Description

NFI Group (NFI CN, CAD 12.62) a Canadian transit bus and motorcoach manufacturer formerly known as New Flyer, is likely worth more than 50% over the current price.  If the business performs roughly in-line with management's current projections for 2024 and 2025, the share price seems likely to attain at least CAD 20.00 per share over the next year which would be 7.5x EBITDA of USD 350M for FY 2025, and 14x FCF of USD 125M, and to likely perform well over the next 3 to 5 years partially due to a convergance of secular and cyclical tailwinds still in early innings, and as unprecedented supply chain disruption continues to abate.

As they describe themselves:

About NFI

Leveraging 450 years of combined experience, NFI is leading the electrification of mass mobility around the world. With zero-emission buses and coaches, infrastructure, and technology, NFI meets today’s urban demands for scalable smart mobility solutions. Together, NFI is enabling more livable cities through connected, clean, and sustainable transportation.

With 7,700 team members in ten countries, NFI is a leading global bus manufacturer of mass mobility solutions under the brands 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 currently offers the widest range of sustainable drive systems available, 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 100,000 buses and coaches around the world. NFI’s common shares (“Shares”) trade TSX under the symbol NFI, and its convertible unsecured debentures (“Debentures”) trade on the TSX under the symbol NFI.DB. News and information is available at www.nfigroup.com, www.newflyer.com, www.mcicoach.com, www.nfi.parts, www.alexander-dennis.com, www.arbocsv.com, and www.carfaircomposites.com.

The stock price fell 10% on Jan. 17, 2024 as the company trimmed guidance for EBITDA in 2024 (midpoint lowered 6% from $275M to $260M) and in 2025 (from $400M to $350M, -13%) with sales guidance unchanged: 2023: $2.75B at midpoint, 2024: $3.4B at midpoint, and 2025: $4B.  While sales growth remains impressive, the reduced profit forecast shows that regaining pre-COVID profit margin still remains a work in progress as the supply chain is not yet fully back to normal.  NFI has added many new suppliers and claims they should be back to 2019 production level (1,500 units a quarter, 6,000 per year) by 2025.

The business should grow at above average rate through 2030 as government mandates and government funding in the U.S. & Canada push both countries to adopt zero-emission buses ("ZEBs").

NFI is the largest manufacturer of heavy duty transit buses in North America, which just over 40% market share.  The #2 player with just over 30% market share is privately held Gillig based in California.  Other major competitors are Nova Bus (owned by Volvo, but in 2023 withdrew from U.S. market, still very strong in Canada), and the U.S. subsidiary of Chinese firm, BYD Co. Lt. (1211 HK) which has been hampered by anti-China and "Buy America" laws.  BYD is also a partner with NFI's UK subsidiary, Alexander Dennis Ltd., in manufacturing electric buses in the UK.  China's Yutong Bus Co. Ltd. (600066 CH) is the largest bus company globally (much bigger than BYD in buses), but doesn't compete in North America, although Yutong has recently entered the UK market and is gaining share there.

Another comparable would be the Brazilian firm Marcopolo (POMO4 BZ) which has been a major investor in NFI since acquiring a 19.9% stake at CAD 10.50 per share in 2013, and selling just over half of it at CAD 40.00 per share in 2016.  They bought more during 2023, increasing their then 8.5% stake to just under 10%, participating alongside NFI's largest shareholder, Coliseum Capital Mgmt. (owns 26.2% of NFI) as the major buyers of NFI's three equity issuances during 2023 which were part of a comprehensive reboot of the balance sheet which resulted in total equity raised of USD 264M with 41.76M new shares issued at about CAD 8.50 per share on average.  Coliseum provided most of the equity raised and also $180M in Second Lien Financing (14.5% interest rate).  Details of the refinancing available here: https://www.nfigroup.com/news-releases/news-release-details/nfi-completing-comprehensive-refinancing-plan#:~:text=%E2%80%9CThe%20completion%20of%20this%20Refinancing,President%20and%20CEO%20of%20NFI.

Offsetting somewhat the high interest rate recent debt issued last year, NFI in late 2021 issued CAD 338M in convertible bonds outstanding with a 5% coupon and convertible at CAD 33.15 per share, maturing 1/15/27.

NFI also became the largest player in the motor coach industry in North America with the acquistion of Motor Coach Industries ("MCI") in 2016.  Prevost (also owned by Volvo, like Nova Bus) exited the public sector motor coach market recently.  Other competitors are Daimler and relatively new foreign players like Van Hool (Belgium) and Temsa (Turkey).  The motor coach industry in North America is still at less than half of its pre-Covid rate of deliveries, and motor coach sales are only 15% of NFI's total revenues.

NFI's access to capital allowed them to survive the post-COVID supply chain crash which put one of their competitors (Proterra) into bankruptcy and seemingly caused Volvo to pull Nova Bus out of the U.S.  See this Aug. 29, 2023 article:   https://www.smartcitiesdive.com/news/why-transit-bus-makers-struggling-orders-financially-growth/692037/

So NFI enters 2024 with very high demand and less competition, an unusually good setup.

If you live in New York (as I do), or Houston, or Toronto or many other major cities you've likely seen if not used a bus built by New Flyer.  I saw the great value investor Christopher Browne (of Tweedy Browne) on an NFI-built New York City M4 bus going up Madison Ave one sunny afternoon after work in the spring of 2008 I think it was.  I wanted to talk to him but decided to leave the man in peace.  Alas, he passed away from a heart attack about 18 months later in 2009 at only 63, so I should have taken that moment to tell him how much his work had inspired and influenced me at the beginning of my career.  Ok, weird digression I know, but I'm leaving it in.  Anyway, that bus was an older diesel model, whereas now they are mostly the hybrid (diesel / electric) or fully electric models. ZEBs should be 25% of deliveries in 2023, rising to 40% in 2025.

Here's a picture of an NFI hybrid in New York city, and below that a picture of a fully electric model also in NYC:

Higher margin, less cyclical aftermarket parts are 24% of sales.

BMO is NFI's longtime investment banker and BMO initiated coverage of NFI on Oct. 25, 2023 with a 34 page report that is worth reading.  The rating was OP (out-perform) and the price target CAD $17.00, vs. $13.18 then, and $12.62 now. BMO has covered the stock since 2006 (NFI IPO'd at C$10.00 in 2005 via CIBC & BMO), with various analysts, but this new take on it by analyst Tamy Chen (at BMO since 2015, picked up coverage of NFI in Oct. 2023 after former BMO analyst Jonathan Lamers left in July 2022) is really well done.  A couple of helpful charts from her report are shown below and highlight how resilient and important the aftermarket parts business is for NFI:

The annual information form (AIF) is highly informative:  

RISKS:  NFI has a major labor agreement expiring October 2024, and nearly half of NFI's 7,700 employees are unionized, so a strike would be bad.  Also, should the current conflagration in the Middle East (led by Iran) along with Russia's war in Ukraine spiral into WW3, a prospect that seems increasingly less remote of late, that would be bad for supply and demand.

Catalyst

The main catalyst is for NFI to achieve their projections.  And while there's no indication that this is under any consideration, maybe a dual listing in the US might help the stock price, as Canadian small caps (S&P/TSX Small Cap Index) trade at EV/EBITDA multiple of 8.2x EBITDA for 2023, while the R2000 trades at 15x EBITDA for 2023 (both as per Bloomberg).  NFI already reports in USD, so like Gildan Activeware, another Coliseum Capital holding, which has been dually listed since its 1998 IPO (GIL on the TSX, and GIL on the NYSE), NFI looks similarly well suited for that move.  Lastly, as the business mix shifts more towards electric bus, the valuation multiple probably gets a boost.