Standard Profil - Looking further down the road
All,
Please find our updated model here.
Who would want to be an auto supplier? OEMs continue to suffer from supply shocks including chip shortages, Russo-Ukrainian war, Covid-19 lockdowns in China and raw material inflation, all of which will lead to a lower OEM production volume for FY22. All combined make it a difficult environment for Standard Profil. However, notwithstanding risks from cancellations, demand levels remain robust with long lead times for some vehicles.
Therefore we have revisited our model on Standard Profil and examined their cashflow and guidance given the lower volume and higher inflationary pressures.
Recent Trading:
- Standard Profil published their Q1 results at the end of May which were in line with our expectations. The improvement in top-line was driven primarily by two factors - price increases achieved and the new product launches of battery vehicles in Mexico and China. These are partly the new order gains Standard Profil achieved in FY20 & FY21 which are now in production phase. This in turn has driven Tesla to be Standard Profil’s number 2 customer, at c.15% of Q1 revenue, versus 3% in FY19.
- As expected, Gross Profit margin was down due to raw material cost inflation and energy costs. Standard Profil are still negotiating with its customers re: cost pass-throughs and based on the outcome of these negotiations it is expected to claw back some of cost inflation, including Q1 deliveries. Additionally, Standard Profil have lowered their labour and scrap costs.
- We maintain our expectation that Standard Profil will be successful in achieving cost pass-throughs given the pent-up demand the OEMs are experiencing and the relatively low share of wallet of the product coupled with the sole supplier status’s, which all suppliers of sealing solutions enjoy.
- Standard Profil were unwilling to provide any EBITDA guidance for FY22, but did include a €360-390m revenue guidance for FY22. Taking the midpoint, this is a 18% increase over FY21.
Battery Electric Vehicles:
- In 2021, global BEV sales doubled year over year, and the expectation is BEV will account for 25% of sales in Europe, US and China by FY25. BEV platforms are usually prioritised over older models in the race for semiconductor chips.
- This is important for Standard Profil as recent order wins have increasingly been in BEV segment. 35% of the Standard Profil’s order book is in the BEV segment and therefore, Standard Profil should disproportionally benefit from the increase in BEV production.
Model:
- Based of the guidance of 18% increase in revenue, we assume 10-12% of this is price, with volume making up the difference. Our expectation is for revenue to be at the lower end of this range, as we expect overall volumes to remain muted. However, we are encouraged by the ramp-up of the Tesla order, which gives us some confidence that recent order book wins are converting into top line revenue. It is this that allows us to increase volumes in FY23.
- Using FY21 Annual Report, we estimate contribution margin per vehicle supplied of c. €30. In Q1 ’21 this appears to have increased to c. €33 based on fixed costs outlined by the business at the time of the roadshow. This is encouraging that Standard Profil are able to passthrough some of the raw material price increases. We have modelled for the contribution margin to revert to c. €31 per vehicle, lower than what is visible in Q1.
But where is the Cashflow?
- It should be noted that even with volumes increasing in FY23, we continue to model the business to be cashflow negative to neutral in FY23. Our FY23 EBITDAR is c. €77m, which after CAPEX of €45m interest of €20m, €12m of rent, and some investment in Working Capital due to higher volumes the business is cashflow neutral at best.
- Our expectation for FY23 EBITDAR margin is c. 18%, which is below FY18-20 of c. 20%. However, unless raw material prices fall significantly, we believe Standard Profil will have to reduce margin to increase its volume. With current expectations of increased OEM volumes, this should drive revenue and EBITDA improvement, but it is difficult to model any significant positive cashflow.
- However, with EBITDAR increasing, leverage will reduce to more realistic levels, ending FY23 at 4.3x.
Outstanding Issues:
- We have some outstanding issues with the Company. We are seeking clarification of the expansion of their Mexican plant. Standard Profil have acquired a 2nd hall in Mexico, adjacent to their existing plant as they anticipate increased volume. We are seeking some further details on size and potential increase in labour to gauge the overall impact on Standard Profil’s top line revenue.
Positioning:
- We maintain our position, even if it has shrunk to approx. 4% at current levels. Unfortunately, we took the position in late February at 80% but at current levels (65%) we are happy to maintain our position. Notwithstanding the tightness of cashflow, the upcoming quarters should provide support to the bond.
- At the limit, we imagine that VW and other OEMs have enough troubles on their hand at the moment, thus will be willing to accommodate Standard Profil where required to nurse it and other sole suppliers through this period.
- We would expect the bonds to trade to c.15% yield (10pts upside from current levels) when the Company report Q2 numbers in late August.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk