The right business at the right time. That should be a recipe for success for any company.
Unfortunately, it’s not the case for NFI Group Inc. (NFI-T). The Winnipeg-based producer of electrified mass transit vehicles has seen its share price fall 40 per cent in the past 12 months. It continues to pay a dividend, but earnings come nowhere near covering the outlay.
The company is struggling and investors are fleeing. What’s gone wrong?
First, some background. Although based in Canada, NFI is an international company, with manufacturing facilities in this country, the United States and Britain. Its brands include New Flyer (heavy-duty transit buses), MCI (motor coaches), Alexander Dennis Ltd. (single and double-deck buses), Plaxton (motor coaches), Arboc (low-floor cutaway and medium-duty buses), and NFI Parts. NFI offers a wide range of sustainable drive systems, including zero-emission electric (trolley, battery and fuel cell), natural gas, electric hybrid and clean diesel. In total, NFI supports its installed base of more than 105,000 buses and coaches around the world.
You’d think that would virtually guarantee success at a time when there’s a worldwide push to replace gas and diesel vehicles with electric ones. But so far it’s not working out. Supply chain problems are a major reason.
In September, the company announced it was halting production at some of its facilities and scaling back at others. It also cut its guidance for the 2021 fiscal year, reducing its revenue projections to between US$2.3-billion and US$2.5-billion from between US$2.8-billion and US$2.9-billion. The outlook for adjusted EBITDA was cut from between US$220-million and US$240-million to between US$165-million and US$195-million – a drop of almost 22 per cent, based on the midpoint. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.) The stock fell 20 per cent after the announcement.
Third-quarter results, which came out in November, confirmed NFI’s problems were continuing. The company delivered 752 units in the quarter, a drop of 43 per cent from the previous year. For the first nine months of the 2021 fiscal year, the company delivered 3,926 units, down 21 per cent from 2020.
Third-quarter revenue was US$492-million, down 26 per cent from the prior year. Nine-month revenue was US$2.36-billion, off 10 per cent. The company reported a third-quarter loss of US$15-million (22 US cents a share). For the nine months, NFI showed a profit of US$3-million (5 US cents).
“Our quarterly results were impacted by global supply chain and logistics challenges that combined with the ongoing COVID-19 pandemic to create significant bottlenecks and disruptions to our operations,” Paul Soubry, chief executive officer of NFI, said in the earnings news release. “In response to these issues, we made the prudent, albeit difficult, decision to reduce new vehicle input rates that resulted in the temporary idling of certain facilities and adjusted production rates in others.”
Mr. Soubry went on to thank the company’s banking partners for be “incredibly supportive” through all of this – a comment that suggested some difficult behind-the-scenes discussions with its bankers.
Sure enough, the company subsequently announced a bought deal for $488-million in convertible debentures, including an overallotment option. The debentures pay 5-per-cent interest and have a conversion price of $33.15 a share. The proceeds are being used to reduce the outstanding balance under the company’s senior credit facilities.
Meanwhile, NFI continues to pay a quarterly dividend of 21.25 cents a share (85 cents a year), to yield 4.5 per cent at the current price. But with earnings way down, the question investors are asking is whether the dividend is sustainable at this level. A cut would create more downward pressure on the stock.
New orders keep pouring in. At the end of the third quarter, NFI had a backlog of 8,103 units with a value of US$4-billion, and the company announced several hundred more orders in the fourth quarter. But you can’t build buses without computer chips and parts, and that’s the position NFI is in right now.
Management has told investors not to expect a quick turnaround. No improvement in financial results is expected until the second half of this year. However, NFI did reaffirm its 2025 target adjusted EBITDA guidance range of US$400-million to US$450-million.
The steep decline in the share price looks like an opportunity for patient, long-term investors. But there’s a risk of more downside in the next few months, especially if the company is forced to cut or suspend the dividend.
If you own the stock, my advice at this point is to hold. If you don’t own the stock, put it on your watch list. As recently as 2018, the shares were trading at close to $60. It’s not inconceivable they could approach that level again in the coming years, if the company can get through its current rough patch.
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