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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 (TSX: NFI). The Winnipeg-based producer of electrified mass transit vehicles has seen its share price fall 50% in the last 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 U.S., and the United Kingdom. Its brands include New Flyer (heavy-duty transit buses), MCI (motor coaches), Alexander Dennis Limited (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 over 105,000 buses and coaches around the world.
You’d think that would virtually guarantee success at a time when there’s a world-wide 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.
Last 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 $2.3-$2.5 billion from $2.8-$2.9 billion (note that NFI reports in U.S. dollars). The outlook for adjusted EBITDA was cut to $165-$195 million from $220-$240 million– a drop of almost 22%, based on the midpoint. The stock fell 20% after the announcement.
Fourth-quarter results, which came out this month, confirmed NFI’s problems were continuing. The company delivered 1,087 units in the quarter, a drop of 12% from the previous year. For the the 2021 fiscal year, the company delivered 3,783 units, down 13% from 2020.
Fourth-quarter revenue was $695 million, down 2% from the prior year. Full-year revenue was $2.36 billion, off 10%. The company reported a fourth-quarter loss of $8.7 million ($0.12 a share). For the year, NFI showed a loss of $14.5 million ($0.21 a share).
“In the near-term, our global supply chain remains highly volatile and unpredictable and we have not yet seen improvement on key parts,” said CEO Paul Soubry “With our recent contract wins, strong backlog and expected new orders, we do plan a more significant ramp-up in both production and volume deliveries in 2023 as supply challenges are expected to ease.”
In the fourth-quarter press release, the company added, “Management is currently in detailed discussions with its banking partners to obtain further covenant relief extending into the first half of 2023. Management believes that, with the anticipated covenant relief, the Company’s cash position and capacity under its existing credit facilities, combined with anticipated future cash flows and access to capital markets, will be sufficient to fund operations, meet financial obligations as they come due and provide the funds necessary for capital expenditures, dividend payments and other operational needs.” That suggested some difficult behind-the-scenes ongoing discussions with its bankers.
Meanwhile, NFI announced a reduction of quarterly dividend, to $0.0531 per share creating more downward pressure on the stock.
New orders keep pouring in. At the end of the fourth quarter, NFI had a backlog of 8,448 units with a value of $4.5 billion. But you can’t build buses without computer chips and parts, and that’s the position NFI is in right now. In its release, the company said, “In response to supply chain challenges and disruptions, management lowered NFI’s 2022 first half production rates to limit the build-up of work-in-progress inventory and to focus on cost reduction and cash generation efforts across the businesses, including reductions in overhead, general expenses, and capital expenditures.
Management has told investors not to expect a quick turnaround. The company expects adjusted EBITDA to decrease year-over-year to $100-$130 million in fiscal 2022, as it does not expect to receive any government grants. In addition, ongoing supply chain disruptions will lower production rates, with more pronounced impact in the first half of 2022.”
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, 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.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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