Celestica downgraded to “Hold” at Beacon Securities

Following a sharp upward surge in its share price that began in April, Beacon Securities analyst Gabriel Leung has downgraded Celestica (TSX:CLS) on valuation concerns.

On Tuesday, July 31, after the market close, Celestica will report its Q2, 2018 results. Leung expects the company will post Adjusted EPS of $0.26 on revenue of $1.57-billion, a little below the street consensus of earnings of $0.28 on a topline of $1.61-billion.

In a research update to clients today, Leung downgraded Celestica from “Buy” to “Hold” while mainained his target price of (US) $13.00, which implied a return of seven per cent at the time of publication.

The analyst explained his reasoning.

“We are downgrading Celestica to Hold from Buy largely based on valuation. Our $13.00 target price, which is based on 6x CY18e EV/EBITDA remains unchanged and represents a 7% potential return,” Leung noted. “Valuation-wise, Celestica is trading at ~6x current year EV/EBITDA versus the group at ~7x. If we exclude outliers, then we Celestica is trading in-line with the group average of ~6x.”

Leung thinks Celestica will generate EBITDA of $281-million on revenue of $6.24-billion in fiscal 2018.

The analyst says margins, which are always a hot topic around CLS, may be facing some new pressure.

“(Celestica) guided for H2 2018 operating margins to improve to the 3.5% range (Q1 was ~3%) so we will see if that guidance remains intact,” Leung said. “While the company has been managing expenses through restructuring initiatives, it also did highlight pricing pressure and component shortages, which could limit the extent of near-term margin improvements.”