Corporate Canada Starting to Reap Gains From Currency Dropby and
CGI Group Exhibit A for Companies Benefiting From Low Loonie
Forestry, autos, gain while manufacturing a mixed bag
The benefit of a weaker currency is beginning to spread through corporate Canada.
Companies such as CGI Group Inc. and DHX Media Ltd., which sell services abroad designed by workers in Canada, are emerging as big winners from the currency’s almost 30 percent decline in the past three years. Forestry, autos and manufacturing are also getting a lift as they win market share with cheaper products.
“The drop in the Canadian dollar means that if you find a U.S. company that will move their work to Quebec, just on the currency alone, they are going to get a 30 percent discount," CGI’s Chief Executive Officer Michael Roach said in a phone interview last week. The CEO is on the prowl to lure more U.S. work to its Quebec operations along with a major acquisition. “We see this is as an opportunity.”
Shares of CGI, which gets almost one-third of its sales in the U.S., surged to a record after reporting better than forecast fourth-quarter earnings on Jan. 27. The company generated C$1.3 billion ($930 million) in cash in the past 12 months, and Chairman Serge Godin said in the same interview the Montreal-based company could spend as much as C$8 billion in cash on a deal.
Canada’s economy has been hobbled by the commodity slump as energy and mining companies cut investment and jobs, and analysts have lamented the inability of non-resource exporters to make headway amid competition from countries such as China and Mexico. Beneath the surface, the currency’s tumble to 2003 lows is stirring a revival.
Greg Taylor, a fund manager at Aurion Capital Management Inc in Toronto, which manages about C$8 billion, is buying CGI and DHX Media, the largest independent producer and distributor of children’s shows, including the Teletubbies, because of their international exposure. DHX shares have declined 11 percent over the past year, after rising more than four-fold in the two years before.
Shares of CGI fell 0.6 percent to C$60 at 10:42 a.m. in Toronto, while DHX Media rose 0.5 percent to C$7.75.
“That’s a constant thing that everyone’s going through now, is trying to screen their companies for foreign revenues to try and get in those areas,” Taylor said in a Jan. 20 telephone interview. DHX, based in Halifax, Nova Scotia, declined an interview request with Bloomberg News.
Manufacturing is also feeling the loonie updraft, particularly those companies hooked into the booming North American auto industry. Solid export gains and accelerating household disposable income growth lifted auto sales in Ontario to a record last year and a further increase will probably occur in 2016 as exports gain momentum, Carlos Gomes, economist at Bank of Nova Scotia said in a report last week.
Even with sluggish global demand, 17 out of Ontario’s 21 manufacturing sectors posted export gains above 9 percent in 2015, with more than half reporting advances of more than 20 percent, Gomes said. Export gains are also expected to lift economic activity and vehicle sales in British Columbia and Quebec, he said.
Ontario clothing manufacturers posted 47 percent growth in the 12 months that ended in November, while fabricated-metal producers saw gains of 30 percent and wood manufacturers gained 26 percent, according to data compiled by Bloomberg.
"Strengthening exports are particularly evident in British Columbia, with nearly half of all manufacturing industries posting export growth in excess of 20 percent in 2015," Gomes said in the report.
Canada’s two big auto-parts suppliers Magna International Inc. and Linamar Corp. have slumped in recent weeks as investors worry auto sales have reached a peak, leaving the company’s price-earnings ratios at 7.7 percent and 8.9 percent respectively.
Canadian National Railway Co., the country’s biggest railroad, has benefited from both the export boost and the lower costs wrought by a declining currency, reporting earnings last week that exceeded analysts estimates.
"We are in position to support those shippers for whom the weak Canadian dollar has become a cost advantage like the manufacturers, like the service industries that are selling into the U.S. market, for example the forest product industry and the Canadian port-terminal industry," said Jean-Jacques Ruest, chief marketing officer, in a conference call.
Manufacturers with exposure to the oil sector are having a tougher time. Canadian exports overall are at about the same level they’ve been since September 2014.
“A falling currency is nice but it’s not going to solve the weak market dynamics we have to face,” Velan Inc. Chief Executive Officer Tom Velan said in a telephone interview.
The Montreal-based industrial steel-valve manufacturer has seen a lot of delays and cancellations in orders in the oil and gas sector and “that’s not going to change even with the dollar at this level,” Velan said. While a weaker loonie helps lower costs and make Canadian production more competitive, the dollar is still quite high when compared to Asian currencies and the company announced the closure of a Montreal-area plant in October, he said.
New Flyer Industries Inc., the largest transit bus manufacturer in North America, has Canadian customer contracts that are impacted when the loonie drops as they were priced and bid with a significant U.S. dollar input cost, Chief Executive Officer Paul Soubry said in an e-mail. While dramatic drops in the loonie can help the company’s U.S.-based motor coach business, it has established a supply base that “makes it very difficult” to change suppliers to take advantage of the low dollar, he said.
“We do not operate our business to gain or lose on FX movement,” Soubry said. The company’s shares have gained 93 percent over the past year.
Roach at CGI said it takes time to convince customers.
"The average guy in the United States doesn’t necessarily follow the Canadian currency, and we have to educate them on that," he said. "It’s only a matter of time.”