by Tajinder Dhillon.
Merida Industry Co. Ltd. (9914.TW) is the second largest Taiwanese company in the leisure products industry that focuses on the manufacturing and production of bicycles and e-bikes. COVID-19 resulted in a structural change in transportation habits last year, as individuals avoided public transport and focused on health and wellness. Growing demand for bicycle and e-bike transportation in key markets including China, Europe and U.S. is creating a positive outlook for this bicycle manufacturer.
Merida Industry is expected to post results on March 29 and has a positive Predicted Surprise (PS) of 5.9% at the time of our forecast (NT$12.90 SmartEstimate vs. NT$12.18 mean). The PS compares the StarMine SmartEstimate to the consensus mean. By overweighting analysts who are more accurate and timelier, the SmartEstimate provides a refined view into consensus. Comparing the SmartEstimate to the mean estimate leads to our PS, which accurately predicts the direction of an earnings surprise 70% of the time.
Refinitiv StarMine offers a suite of quantitative equity analytics which allow institutional investors to improve the investment decision-making process and better control for risk management. Looking at Refinitiv Eikon, Exhibit 1 displays the Combined Alpha Model (CAM) for Merida Industry. CAM combines all available StarMine alpha models in an optimal, static, linear combination.
Exhibit 1: Combined Alpha Model – Merida Industry
CAM provides a snapshot of a company in an easy-to-read, digestible format. Model scores are ranked from 1-100 with higher scores indicating a bullish signal. Merida Industry has experienced strong momentum, both in the stock price (+220% over last year) and upward analyst revisions. The strong momentum can lead to stretched valuations, which explains the lower scores in the Relative Valuation category. The company’s fundamentals are well-aligned to current institutional buying preferences according to the Smart Holdings model. Earnings Quality is also strong with high cash flow generation and operating efficiency through the form of operating profit margin and asset turnover.
Bullish analyst revisions
Looking at some of the models in more detail, we start with the Analyst Revisions Model (ARM) as shown in Exhibit 2. ARM looks at analyst estimate revisions across revenue, EBITDA, and EPS over the current quarter, current year, and upcoming year, while also incorporating changes in recommendations. Merida Industry has an ARM score of 73, which is a percentile ranking relative to regional peers in Emerging Asia Pacific.
Exhibit 2: Analyst Revisions Model – Merida Industry
Revenue estimates have declined for the upcoming quarter, which is likely due to supply constraint issues. However, management has issued guidance for a positive outlook in 2021 with rising e-bike penetration in U.S. and Europe, while targeting 50% revenue growth in China (Source: Refinitiv Eikon, Dow Jones). The 2021 EPS consensus estimates have increased 26.4% over the last six months from NT$ 11.09 to NT$14.02. Gross profit margin expectations in 2021 have also increased by 95 basis points from 14.15% to 15.10% over the last six months.
As Europe is a key market for Merida, we saw bicycle purchases soar in the United Kingdom in 2020. With three national lockdowns, consumers resorted to bicycles for health and wellness and transportation as shown in Exhibit 3. According to the Office of National Statistics, bicycle purchases rose to £490m in 20Q3, a 33.2% YoY increase. Government policies such as “Cycle to Work” and “Fix Your Bike” also support bicycle usage.
Exhibit 3: U.K. Bicycle Purchases in 2020
Merida Industry also has the highest expected future revenue growth compared to industry peers Giant Manufacturing Co. (9921.TW) and Shimano Inc. (7309.T). Merida Industry has an 8.6% compound annualized growth rate in FY1-FY3 revenues, compared to 6.2% for Giant Manufacturing Co. and 2.3% for Shimano Inc.
The ARM model acts as a predictive tool in gauging future analyst revisions. Typically, we see the consensus estimate move towards the SmartEstimate. In Exhibit 4, looking at the bottom right chart for 2021 EPS, we observe the blue line (consensus) gradually moving towards the gold line (SmartEstimate). Investors will benefit from upward revisions through stock price appreciation.
Well-aligned to insitutional buying preferences
StarMine Smart Holdings Model (SH) predicts forward changes in institutional buying and selling by determining which factors are currently favored by institutional investors and which stocks are becoming more or less desirable in the current environment. Twenty-five fixed factors across volume, price momentum, profitability, value, growth, analyst revisions and leverage are utilized and ranked from most popular to least.
Merida Industry has a current SH model score of 82 relative to peers in Emerging Markets. It also demonstrates a strong SH score of 84 and 82 at a sector and industry level as shown in Exhibit 4.
The model score is updated daily and reacts quickly to changes in company level fundamental data. We can see this in action, as Merida Industry had a SH score of 9 during the peak of the pandemic and has improved throughout the year, likely due to a combination of improving company fundamentals and improved alignment to institutional buying preferences.
Exhibit 4: Smart Holdings Model – Merida Industry
Looking closer at the data in Exhibit 5, we can see why Merida Industry is well-aligned to current institutional buying preferences. Factors including price momentum and growth are currently in favour amongst institutional investors as per the popularity rank column. As already discussed, Merida Industry is experiencing strong momentum. Looking at other areas, profitability and leverage is also highly likely to pass the screen of an institutional investor.
Profitability is strong with ROE and ROA at 24.8% and 13.3% respectively and a return on invested capital of 12.6%. Merida Industry also has a FY21 Free Cash Flow/EBITDA ratio of 45.0%, which can be calculated using the Refinitiv Eikon excel add-in. There are minimal concerns around leverage given interest coverage at 34.6x and a debt to equity ratio of only 19.0%.
Valuation levels are stretched as already mentioned, given the strong appreciation in stock price. NTM P/E is 22.3x compared to a 10-year average of 17.0x. NTM EV/EBITDA is 26.3x is rich compared to 12.5x for Giant Manufacturing and 16.1x for Shimano.
Exhibit 5: Smart Holdings Screening Factors – Merida Industry
A combination of strong profitability and low leverage is an attractive proposition. Perhaps unsurprisingly, Merida Industry scores very strong in our Combined Credit Risk Model (CCR), which is a multi-pronged approach combining our three stand-alone credit models: SmartRatios, Structural and Text Mining.
Our credit models are designed to look at default and bankruptcy risk over a twelve-month horizon. As per Exhibit 6, Merida Industry has a CCR score of 87, a Probability of Default of 0.03% which maps to a StarMine Implied Rating of AA-. The StarMine Implied Rating provides significant value to investors, especially when third party agencies do not cover the stock, as is the case for Merida Industry.
Exhibit 6: Combined Credit Risk Model – Merida Industry
The Text Mining model, a text-based algorithm analysis of company risk, scans thousands of documents across news, StreetEvents, filings and research to detect words and “bag of words” which indicate credit risk. For companies outside of the United States, filings data is not currently an active component in the model.
Merida Industry has a Text Mining Model score of 93 as per Exhibit 7. Looking closer into the documents, we observe an upbeat tone from various selected broker research documents. There is explicit mention of a positive outlook, potential earnings surprises, and a strong pipeline of orders. All these encouraging factors reduce the risk of any default or bankruptcy concern.
Exhibit 7: StarMine Text Mining Model – Merida Industry
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