Standard Profil - Stuck in first gear
All,
Please find our updated model here.
We maintain our 5% long position in Standard Profil's Senior Secured bond. At current prices, it generates a 26% YTM, but at 60%, this isn't really a yield story. We maintain our view that the business will continue to improve but acknowledge the timeframe has been delayed due to low production levels at the OEMs. The business continues to grow its order book, but the uncertainty over OEM production has led the management to be very cautious on Q4 EBITDA guidance.
Positioning:
- At current levels, we are buying in at less that 4.0x EV/EBITDA multiples. The Company has limited debt ahead of Senior Secured Bond, with the RCF (€30m) currently undrawn and local facilities & on-balance sheet factoring c. €20m. We envisage a recovery of c.70c in a distressed scenario, but our base case is a recovery in EBITDA and bond yields to return to 15-20% range, giving 10-20 points of upside.
- Downside in the bonds is c.50%, (10 points), which is based of 4.0x our FY22 EBITDA expectations of €48m and fully drawing the RCF. It should be noted that there is no upcoming maturities until April 2025 (the RCF) and there will be no distressed scenario during the next two years. The real downside will be a major global downgrade to OEM production levels.
Company Guidance:
- The Company has given extremely cautious guidance for Q4 revenue and EBITDA.
- Revenue is slightly lower than our expectations at 95-105m for Q4 (Sarria: €107m) and with the uncertainty surrounding the level of pass-through, we acknowledge we may be a little high. We feel comfortable with underlying volume assumptions as we continue to see Standard Profil win new orders and improve its order book. The Company continue to expect double-digit revenue growth for FY23.
- The EBITDA guidance gives highlights the uncertainty surrounding Standard Profil’s business. Management have given an €8-18m guidance with the wide range due to potential changes in OEM’s production volumes (and Standard Profil’s cost base).
- But the bigger reason behind the large range is the lack of certainty surrounding price adjustments negotiations with OEMs. This is primarily related to Q3 & Q4 production and Standard Profil’s ability to reclaim some energy and other raw material costs from OEMs.
- The €10m delta is effectively down to negotiation with the Company’s customers and their ability to seek compensation for increased costs.
- We were expecting €13m EBITDA in the quarter, which may be on the high side.
FCF Expectations:
- We have reduced our overall OEM production figures for FY23, bringing down our revenue expectations to €465m for FY23 (16% growth). This level of revenue should generate c. €60m of EBITDA, but this is not sufficient to generate positive FCF.
- Assuming fully drawn the €30m revolver, there is still likely to be a cash crunch in Q3 next year. We fully expect the Company to draw on its factoring facilities to meet its liquidity squeeze but our model highlights the problem with Standard Profil’s ability to convert its EBITDA into cash. The high level of CAPEX, used to secure new orders, means cash conversion is very low.
- FCF will not improve until top-line volume picks up. The business has spent CAPEX in recent quarters to acquire new business but this has not fed through to sales yet.
The role of the OEMs:
- In our downside scenario, we have fully drawn the RCF (€30m) but assumed zero cash under our recovery analysis. We have used a 4.0x multiple, which is in the 4.0-6.0x range for auto suppliers.
- However, any theoretical downside is dependent on whether OEMs offer financial support to Standard Profil.
- We calculate that the cost of Standard Profil’s product is c. €70-80 per vehicle to the OEMs and therefore an extremely small portion of the overall cost of the OEMs manufacturing costs. Standard Profil have sole supplier agreements with the OEMs and therefore there is limited chance of OEMs switching suppliers in the short term.
- It is visible from the recent contract wins, especially in the electric vehicle space, OEMs continue to Standard Profil as a viable supplier.
- Therefore, we would expect OEMs to provide “support” to Standard Profil if required.
- This was demonstrated in the previous quarters when price adjustments were agreed to previous contracts to compensate Standard Profil for the increase in raw materials.
Delta in Guidance:
- The delta in Q4 EBITDA is €10m (range €8m-€18m) which equates broadly to the increase in energy prices. Historically energy prices was €3% of sales, and this has doubled to 6% of sales. H2 sales are expected to be c. €200m, which an additional 3% cost equals €6m.
- We will see how much support the OEMs are willing to give when the actual Q4 numbers are released. To put into context, the €10m delta equates to €3-4 per vehicle additional cost to the OEMs.
We will have a follow-up call with management next week,
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk