Standard Profil - fork in the road
All,
I've attached our updated analysis here.
It’s back to a bet on OEM volumes and sponsor support. In the release, there was more Company background about improving market share but with leverage creeping up it is insufficient to aid a refinancing of the capital structure. Management again reiterated their aim of refinancing the High Yield bonds (May 2026) and upcoming RCF maturities (April 2025) together but offered no insight on how that will be achieved.
The Q2 numbers, in themselves, are not very interesting. The Company had already shared with the market a profit warning in July, so the underperformance and guidance were pre-warned.
Investment Rationale:
- We continue to hold our 5% long position in the Senior Secured Bonds we took in March 2022 at 80%. The 10pts drop over the last couple of months reflects the reducing likelihood of a standalone refinancing, with shareholder and potentially bondholder support now required to meet upcoming maturities. Our long posiiton is underpinned by our view Standard Profil will benefit from their increased order book, we acknowledge the timing of the uplift in OEM production is uncertain.
- The upcoming maturity of the RCF may accelerate any refinancing, our base case remains that the RCF and high-yield bonds will not be refinanced simultaneously. This is contrary to management’s view, but any early refinancing of the bonds will be further upside.
- Downside centres on a confrontational approach from the equity sponsor in their refinancing efforts. However, unless there is further weakness in the OEM data, we don’t see the sponsor pursuing this approach. Standard Profil will be very aware that any adverse publicity will be viewed very negatively by their OEM customers, which would be value-destructive for all parties.
- Our other downside centres on the lack of cash deleveraging in the past. The vast majority of deleveraging comes from higher EBITDA. Cash conversion is poor, but CAPEX levels appear to be flexible depending on the level of new order wins/tenders undertaken, This is a balancing act, as new orders need to be continuously renewed.
- A refinancing at current projections without an equity injection is not possible. Interest cover is c.1.0x and although buying in at current levels of 80%,c. 3.0x pre-IFRS 16 EBITDA, an attractive multiple, we acknowledge there could be 20 points of downside if operations deteriorate.
- Our base case is FY24 will come in close to guidance with a small improvement in FY25. There is the possibility our FY26 projections, EBITDAR of €100m could be accelerated partially into FY25. At 22% YTM investors are compensated for the OEM production risk. We see c.10pts of upside over the remainder of the year, as confidence flows back into the market.
Recent Results:
- Q2 numbers reflect the profit warning in July, and although overall H1 numbers are broadly in line with the expectations at the beginning of the year, Q2 numbers were light. The Company continues to see labour costs increase across its regions, partially compensated by lower raw material and energy prices.
- However, the main issue is volumes. Gross Profil margin was 270bps lower at 15%, due to the recent slowdown in BEV sales by certain key OEM customers and in certain markets, specifically Germany and Italy.
- Although management believes this to be temporary, there is nothing concrete to justify a return to growth for the remainder of the year. Standard Profil has maintained its guidance of €485m revenue and Company EBITDA (Post IFRS 16) of €80m. The Company has reduced its CAPEX guidance to €40m from €45-48m, primarily driven by less new business tendering.
Our forecasts:
- We have taken on board the Company’s guidance for FY24, with our expectation of slightly higher revenue but lower EBITDAR we don’t see a reason to update FY24 projections. However, FY25 and beyond is the bigger issue.
- But the main driver of value is when the order book converts into sales. The timing of this, and the uptick in revenue can mean revenue is either €500m or €600m with EBITDAR ranging from €80m to €100m due to the operational leverage.
- There is no doubt that Standard Profil has gained market share in recent years, and has grown its share from 6% to 8%. However, the business is still over-reliant on the European OEM market, which generates 65%+ of quarterly sales. Standard Profil is joint No. 1 in Europe with a 25% market share.
- Recent weakness in the Vehicle Production forecasts for FY24 and FY25 due to weaker Chinese demand. Standard Profil are underweight Chinese production, with only a 3% market share.
- The magnitude of the order book has grown, and even allowing for inflationary pressures, we calculate it has grown 30% over the last two years. This view is supported by the % of BEV versus non-BEV in the order book, with BEV accounting for c.60% of the order book versus 43% at Q1 2023.
- We have taken a conservative approach, with no meaningful growth in FY25 with the step-up to commence in FY26. That leaves leverage for FY24 and FY25 at 3.7x, stepping down in FY26 due to the higher growth.
OEM Production numbers:
- It is difficult to write a positive note on Standard Profil on the same morning Mercedes-Benz came out with another profit warning, their second in 3 months. However, Mercedes and others cite weakness in China as the main driver of the lowering of production numbers. Standard Profil are underwieght China, with c. 3% market share.
- European production guidance is a little more promising, with some weakness in FY24 and a rebound in FY25 and FY26.
- Standard Profil has improved its market share, both within Europe and(now joint No.1 from 3rd) and globally, due to order wins in FY22-FY23. The result of these order wins should result in production commencing in the coming months and the acceleration of this will ultimately determine the revenue growth in FY25 and FY26.
FY26 is too late:
- We acknowledge that FY26 is too late. The bonds fall due in Mat 2026 and regardless of the RCF, they would require refinancing in FY25.
- The Company needs to do something now. The RCF falls due in April 2025 leading management to work towards holistic refinancing.
- In the past, Actera have supported the business with an equity cheque of €10m in April 2023. There are rumours that they would support the business further, which would be justified due to the increases in the order book and to a lesser extent, the improved diversification of OEM customers. However, we find it difficult to base an investment on the back of speculation about a potential equity injection.
Why long then?
- The above paragraphs are essentially negative, but they should be put into context. The revenue guidance for FY24 of €485m is only 2-3% lower than FY23, the best annual revenue. EBITDAR of €80m would also be lower than FY23, but still an improvement on the FY19-22 period.
- The business remains cashflow positive in FY24 and FY25 despite the lower profit and although CAPEX has marginally declined, it should be noted that 70% of the CAPEX in FY24 is still growth-orientated.
- Despite the profit warning, leverage remains below 4.0x (3.7x) on pre-IFRS 16 basis.
- It is these points, with the expectation of an improving business, that supports our long position.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk