Adler Pelzer - From like to love
All,
Please find our update on Adler Pelzer here.
We have been reviewing our automotive names side-by-side, so as to create a bit of an industry view and ensure we view each bottom-up name in a similar context. Adler Pelzer in that regard - like many automotive suppliers - suffers from low profitability already and even lower liquidity. We are observing little fundamental growth and don’t suppose there is much cost savings to be done. Plans for asset sales and similar are relatively scant and compared to other names we are less comfortable with the legal situation. We have been short and wrong this name and given we liked the short then, we are loving it now. It’s expensive over Christmas, but we think it should trade down in January as the market resets its shorts.
Investment Rationale:
- We have taken a 5% short position in the bonds at 90c/€ as the first of a two short legs in the name. Bonds have risen 7 points on the release of Q3 figures, but we assume they will give that up again early in the new year, when we are looking to exit the first leg again due to the bonds' high coupon. We are planning to re-set the short some time in Q1 when we assume German production volumes to fall.
- Having modelled a somewhat far out recap scenario below, we do not think of it as any short-term prospect, but rather a background for thoughts going into in Q325 when the RCF becomes current. FAs to parade in Q125 to give themselves time to organise restructuring opinions etc.
- We struggle to model enough of a turnaround to eventually refinance these bonds. The DCF is lower than comps, due to low cash conversion from high taxes and lack of organic growth.
Summary:
- Adler Pelzer design, engineer and manufacture Acoustic Soft Trim as well as Plastic and Composite Hard Trim components and systems to the automotive industry. Over 50% of revenues come from Europe and over 60% of revenues are generated from products for the passenger compartment. Clients are highly concentrated where Stellantis, VW, Ford and Mercedes account for over 50% of revenue.
- Pelzer, either as HP Pelzer or now as Adler Pelzer Group (APG), has a long history of struggling with the debt pile it is carrying. The company has had to restructure in the early 2000s and again required fresh cash in the late 2010s from the Italian state. The controlling Scudieri family has subsequently had to invite the Hayashis into their company to help inject €120m in cash in its most recent refinancing.
- Post Pandemic, APG has rebuilt its volumes and via bolt-on acquisitions has grown again, but continues to be barely able to earn its coupon, also because the shareholder loan seems to be cash paying.
- As Europe is struggling with consumer confidence on the back of an inflation-induced cost-of-living crisis, the tilt towards electric vehicles by 2035 is now accelerating, prompting mass lay-offs as certain ICE-related value chains are becoming uneconomical and EV parts not yet widely enough or cheaply enough available (outside China).
- APG's NVH product portfolio is paradoxically now receiving more attention even though EVs are inherently silent. The focus on the soundscape inside EVs is amplifying the demand.
- We have been short into Q3, but EBITDA was propped up by €9m of non-cash earnings and bonds have risen on the improved performance in Asia. The company has exhausted its credit facilities basket by raising a new p.p. loan at AGH GmbH, from which it paid €45m in up-stream loans and dividends to the parent.
Key Value Drivers:
- Asia and NAFTA: Asian automotive production is on the front foot and leads the EV revolution (along with that US manufacturer). US consumer confidence is once again robust. Slower targets for electrification in both countries are less demanding on OEM risk-taking and re-sourcing. The spectre of US protectionism however not only threatens imports from Europe, but also from Mexico.
- Strong German production volumes are partially offsetting weak European figures. However, this could be due to front-loading exports into the US before tariffs are raised and could reverse in Q125.
- Improving Gross Margin: 2024 GM improved on volumes and lower service cost. We assume in APG's favour that it can hold on to those gains, even as European volumes should decline next year.
- Order Intake: Management have been reporting of rising order intake - which we find unsurprising in an age where the soundscape in vehicles is becoming increasingly important. However, European OEMs are slowing down the roll-out of vehicles due to uncertainty of volumes, due to European consumer confidence, the uncertainty around switching towards EVs and US protectionism. So while APG may have won the models, they will likely take longer to materialise into revenues than before. Also, new models typically mean new tooling investments.
Key Risks:
- Liquidity: Management consider €180m minimum cash and the Q324 cash figure still included €30m due to be sent to the shareholder.
- European clients: US protectionism to slow down European and Mexican production for export and shift US vehicle demand towards domestically produced brands. APG to lose more volume in Europe than they'll gain in the US. To the extent that as a result of protectionism European OEMs shift production to the US, APG may be required to make investments in the region to supply those volumes.
- Electrification delays new model roll-out. While the OEMs accept lower volume (loss of market share to Chinese imports) to remain profitable, suppliers just loose volume.
- Rising labour costs: APG's labour costs have soared in 2024 - in line with the wider economy. We maintain wage growth at 5% p.a. for H125 before dropping to zero on aggressive cost cuts.
- German production volumes to plummet in Q125 if currently strong levels are due to frontloading exports into the US before the new presidency.
- Not a reasonable time to recap dividends: Adler Group SPA has been taking an upstream loan from APH GmbH, paid for by a new €68m loan sitting p.p. to the bonds. We don't think this is a good time to be paying dividends. Moreover, the new loan is allegedly in every way pari passu to the bonds. However, as hot as the private credit market may be right now, we can't help but wonder about that.
- There is a good chance the company uses non-recourse factoring lines to keep its receivables at a tight 50 days. Recourse factoring is being reported as small, but non-recourse could be bigger.
Looking forward to discussing this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk