Adient - waiting

All,

Following our take on Adient’s results last week, please find our updated analysis on Adient here.

Thoughts:

- Liquidity is ample and maturities long-dated following this summers’ refinancing. So it would be a macro trade.

- A short is still expensive here. But the market has been driving these bonds up for some months now and we may find them in the mid 90s soon, at which point it may be worth thinking about a tactical entry point - in conjunction perhaps with any trade war expectations at that time.

- Any negative event - including around auto tariffs - should have a significant effect on the company’s leverage.

- Due to its multi cellular set-up across the globe, the continued losses it is forecasting for the SS&M business and the continued high level (if less complex) of new launches, Adient is structurally less profitable than it could be. We feel strongly that there are few sand bags in the budget for 2020 and thus there would be little danger to the upside from the company unilaterally improving its profitability next year.

Despite some already significant turnaround efforts in North America, the SS&M business continues to lose in the order of $200m EBITDA - much of it in Europe. Next year’s scheduled cost achievements and minor asset liquidations are only just about expected to offset the anticipated volume drop in Europe - while China volumes are flat in managements’ projections.

Fixed Costs of 60%:

- If a 2% projected fall in volumes for North America and Europe is to result in $160m loss of EBITDA, then fixed cost in the business is around 60% of sales. So for instance another 2% fall in volumes (total of 4%) would bring leverage to 5x Sarria EBITDA.

EBITDA:

- As earnings have fallen, the “overstatement" of the company’s cash earnings due to income from investments held at equity being (rightfully, but misleadingly) 100% accounted towards EBITDA is becoming more pronounced. Our EBITDA therefore aims at excluding the non-cash portion of such @Equity income, thus producing higher leverage stats, which we feel are more representative of the company’s true position.

Wolfgang