Standard Profil - Conversion
All,
Please find our updated analysis on Standard Profil here.
We didn’t update our model post-Q2 numbers as the actual numbers were in line with our model. There is a summary below but we are more focused on the upcoming quarters and fast-forwarding to FY25 when refinancing will be required. The business has shown its importance within the OEM’s supply chain, having secured price compensation for FY22 which has continued into FY23. The business is supported by the recent uplift in OEM manufacturing, prior year contract wins and the April 2023 equity cheque of €10m from the sponsor. Our attention is now focused on FY25 and the prospects of a successful refinancing.
Investment Rationale:
- We maintain our 5% position we took in March 2022 at 80%. We had expected the bond to re-rate further on the back of the cost compensation agreed with the OEMs in May. Although it has traded up 10pts since then, we would have expected the bonds to trade at c.15% YTM, which is a further 5pts of upside. Our model expects leverage to reduce to 3.7x by year-end and below 3.5x by FY24.
- However, we acknowledge the majority of the deleveraging is on the back of higher EBITDA, with minimal cash deleveraging expected during FY23 and FY24. Cash generation is a major concern for us at current gross margin and EBITDA levels. Gross margins were in the mid-30% in FY18 & FY19, versus 31% in H123. Our model expects this margin to contract in H2, due to some deflation in Standard Profil’s raw materials.
- We have outlined these concerns to management and they are aware of our difficulties in modelling a strong enough uplift in profitability. The Company are in the process of forming a budget for FY24 and we would expect the Company to share these plans at Q3 numbers.
- We have been somewhat cooling off on the name, as we struggle to improve margins sufficiently to make a refinancing possible. Our projections come out at the bottom end of the Company’s reiterated guidance and we have not yet factored in oncerns over VW production levels.
- In the shorter term, however, the Company will have good momentum for the remainder of the year, and there is a possibility Standard Profil outperform their own guidance through cost-cutting measures. We have modelled these savings to impact late FY24 and into FY25 and recent conversations with management suggest this is a conservative viewpoint.
- We therefore still expect the bonds to trade up in the coming months into the release of Q3 numbers in late November and will re-evaluate our position then.
Recent Results:
- Q2 2023 was the second-strongest revenue quarter in Standard Profil’s history. This was driven by increased production levels, additional project ramp-ups and the cost inflation compensation agreed with the OEMs. Note: we have adjusted the revenue to exclude the compensation effect from prior years.
- The business continues to take out further costs. Standard Profil has transferred some operations from their plant in Spain to Morocco, with the initial phase almost complete. The remaining two projects are expected to transfer in December 2023.
- This is part of the wider cost savings program which is on track to exceed the FY23 target of €28.6m of savings.
- The Company reiterated their FY23 guidance in early September for c. €80m EBITDA on the back of a 16% increase in revenue. This is slightly ahead of our model and therefore we feel comfortable holding this bond into Q3 and Q4 numbers. At current yields of c.18% investors are compensated for the risk.
Operational Leverage:
- Unfortunately, the Company has provided no guidance on future years' profitability. The business needs to improve EBITDA to above €100m to demonstrate meaningful cash flow to improve interest coverage for a potential refinancing. Our current projections of c. €90m EBITDA, less €5m taxes and c.€45m of CAPEX, leaves interest coverage at c.1.5x. This is using the current 6.25% HY coupon, which should be too tight for a refinancing.
- The Company can increase production (and we acknowledge recent contract wins from OEMs are not yet at full throttle) which should improve margins. However, it is difficult to put a realistic probability of EBITDA exceeding €100m in the medium term.
- Projections from Global Data still project a significant uplift in light vehicle production for FY24 and FY25 over recent years which would drive a substantial uplift in Standard Profil’s revenue numbers. However, with the current economic outlook, we remain cautious.
- The operational leverage will come from recent contract wins. As an example, in Q1 2020, Tesla accounted for 2% of overall revenue, it is now the largest single OEM at 18%.
- Note, VW still matters. VW has fallen from 22% to 18% in the same period. Combining VW with Audi and Seat, the share has fallen from 40% to 33%.
Refinancing:
- Using our modest projections, leverage would fall to c. 3.0x by FY25, with the business generating c. €36m of FCF before interest. Assuming an 8-10% coupon, with 2x interest coverage, recovery solely from a new bond would range from 60-100%.
- This is a downside scenario and ignores any recovery from ownership of the business. OEM suppliers should trade north of 3.0x to give a 100% recovery, but this quick analysis highlights the difficulty the Company faces.
- We are not exiting the name on the back of this analysis, but the “refinancability" of the Company remains to the fore of our thoughts.
Next Steps:
- We have had a recent conversation with management about blue sky thinking, and have some follow-ups on their cost-saving “Sprint 25” program. We don’t feel comfortable in adding all of these savings to the bottom line as we expect some of these will have to be “shared” with the OEMs.
- We expect further questions regarding budget/guidance for FY24 and beyond and will likely use this as a basis to test our projections and refinancing assumptions.
- Ultimately, the refinancing of Standard Profil in FY25 will be driven by top-line revenue growth, which is dependent on overall OEM volumes. Standard Profil appears to have won substantial contracts in recent years, but this will count for little without overall OEM volumes, especially in Europe, stepping up.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk