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Exco Technologies – $XTC.to

I have been loosely following Exco for a few years. I thought it was a good time to do a more formal write-up given the drop in share price and the uncertainty surrounding the covid lockdowns.

Background

Exco Technologies Limited, together with its subsidiaries, designs, develops, and manufactures dies, molds, components and assemblies, and consumable equipment for the die-cast, extrusion, and automotive industries. It operates through two segments, Casting and Extrusion, and Automotive Solutions. The Casting and Extrusion segment designs, develops, and manufactures die-casting and extrusion tooling and consumable parts for aluminum die-casting and aluminum extrusion machines. The Automotive Solutions segment produces automotive interior components and assemblies primarily for passenger and light truck vehicles. This segment offers synthetic net and other cargo restraint products, injection-molded components, shift/brake boots, instrument panel components, sun visors, seat covers, head rests, other cut and sew products, and related interior trim components and assemblies. This segment also supplies plastic trunk trays and organizer systems, floor mats, and bumper covers, as well as die cut leather sets for seating applications. It operates in Canada, the United States, Europe, Mexico, South America, Asia, and internationally. Exco Technologies Limited was founded in 1952 and is based in Markham, Canada.

The Automotive side of the business is subject to new car sales as well as some aftermarket sales. They are Tier 1 and Tier 2 suppliers.

The Casting and Extrusion seems to be exposed to broader economic activity. They have some pretty complicated processes set up that would be hard for a customer to transfer to another supplier overnight. They are benefitting from the move to more aluminum being used on vehicles to reduce the weight of the vehicle and increase fuel efficiency.

The company pays a dividend and is currently yielding 5.8%. The market cap is about $260mil and EV is $237mil. There’s about 40 mil shares outstanding. The business operates in 15 different plants globally with over 5,000 employees and much of their execution relies on direct labour so they are subject to local wage pressures. The contracts can be longer in length to provide some stability, but can also have stepped increase in costs. If you haven’t picked up on it yet, his isn’t your compounder software stock that will trade at 10x revenue one day.

Business Performance

On the surface the business looks like it’s been in decline. The main result is from them selling off an underperforming part of the business (ALC – Automotive Leather Company). Gross margins have remained consistent over the last few years. Operating margins have been stable to slightly downward as operating expenses have ticked up a little.

Balance Sheet

The CEO mentioned on the latest call that they are not an aggressive business that will lever up the balance sheet with a ton of debt to do an acquisition. They have only been above 1x Ebitda in debt for a very brief period over the last 10 years and that was in 2016 when they acquired AFX Industries. After the purchase of ALC in 2014, they landed just over 0.60 d:ebitda. The debt was quickly reduced. They have a $0.60 in net cash at the moment.

Capex

Given how much this business relies on fixed assets, it’s important to take a look at the capital expenditures. Some of the capex is spent for growth, but the majority is probably maintenance. Taking a long look at a business that hasn’t changed much over the last decade gives lots of context.

The annual capex spend ranges widely. 15-30mil annually for a business doing less than 500mil in revenue at the moment is not insignificant. They expense a little over 20 mil annually in depreciation and amortization. The plan for fiscal 2020 (ending Sept 2020) was to spend 32 mil in capex; 16mil for maintenance, 10 mil for construction and build-out of a greenfield facility in Morocco and plat expansion in Uxbride and 6 mil in maintenance  and targeted capacity adds in Auto segment. They have spent 18mil in the first 3 quarters, I would imagine that there would be some delays from the covid lockdowns.

They have seen capex climb up from 3% of revenue to 6% of revenue in the last 3 years.

Mgmt Comp and Ownership

Things are a little interesting with the board and management. The CEO is son in law of the the Executive Chairman who was the CEO previously. The Executive Chairman owns almost 10 mil shares or 25% of the company. He is also on the board of a few other Canadian companies.

There is an independent board member who owns 5.5 mil shares or 14% of the company.  He is on Audit Committee, HR and Compensation Committee, and Governance Committee. 4 of the 7 directors are deemed independent. This provides some confidence in the board.

Though the CEO doesn’t own many shares, his compensation is not sky-high. His total comp over the last 3 years has averaged 500k. Though the Executive Chairman has comp of over 1 mil. Despite the large numbers, they are not as high is I have seen relative to their top line and operating results.

ROE is not as high as ROIC as they have kept some cash on the balance sheet and it isn’t counted in invested capital.

Covid and Lockdowns

The business had been hit hard by the lockdowns. They were unable to lay off employees in Mexico and had to incur extra costs of 1.5 – 2.0 million. The plants were named as essential businesses, but they are navigating around unknown demand picture and taking extra precautions to ensure their employees are safe. The Casting and Extrusion part of the business has performed well and demand looks stable. They have said they view the dividend as a priority and will run a conservative balance sheet. I would expect covid to drag on results (and likely the share price) for the next 3-4 quarters.

Risks

  • As mentioned they wound down ALC which was acquired in 2014. The business underperformed relative to expectations. They did try and right side the business by reorganizing some subsidiaries of ALC  and wind down work as programs came to a close. They have made other acquisitions that had positive results.
  • The business has plants all over the world and many of the workers are unionized. There is a potential for labour disruption in the business.
  • They could have several plants sit idle or underutilized at the same time and this will lead to lower cost absorption and lower margins.
  • Demand for their products due to the covid lockdowns and resulting extremely high unemployment.

Valuation

As you can see they appear pretty cheap based on EV/EBITDA. Profitability may trough out here or in the near future, or we may stay locked inside and never need to use cars again. Who knows.

They own all 15 production facilities and much of it’s equipment that are carried on the balance sheet net of depreciation at 130mil CAD. I would imagine they could sell a facility if needed.

Anecdotal data points suggest that no one (or almost no one) is posting about Exco at the moment as most public bulletin boards have seen little to no activity on the name.

Conclusion

Expectations are low. The business operators are pulling the levers they can to survive the downturn. In the meantime they run a conservative balance sheet while paying a nice dividend. I think this name fits nicely in a dividend portfolio.

Anyone follow Exco? Anyone? Bueller?

 

Thanks,

Dean

 

*the author does not have a position in Exco Technologies Limited ($ETC.to) at time of writing

 

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