Antolin - Will it last?

All, 

Please find our all-new analysis of Antolin here.

We have been reviewing our automotive names side-by-side, so as to create a bit of an industry view and ensure we view each bottom-up name in a similar context. Antolin in that regard - like many automotive suppliers - suffers from low profitability already and low liquidity too. In fact, the company has been struggling ever since it bought the interiors business from Magna. But Antolin has battle mass and some leavers it’s been pulling and now the question is only if liquidity will last for the depth and length of the valley that lies ahead.

Investment Considerations:

- We remain on the sidelines. The bonds are trading rightly at the wide end of the yield spectrum, but unless management can hit our somewhat constructive forecasts, liquidity could become tight very quickly, which would probably drop the bonds down to 60c/€ as the low profitability would not allow for much debt-carrying capacity. Management are selling non-core assets to fund the turnaround plan, but two years in, we cannot yet see all that much effect. 

- Once we gain conviction (H125?) that the company can continue to fund its operations and turnaround, the bonds would become attractive.

Summary:

- Since buying the interiors business from Magna in 2017, Antolin has neither grown’ nor posted an EBITDA margin significantly above 7%. As a result, leverage has become increasingly difficult to carry and the family have had to waive dividends throughout the lifetime of the bonds. Management have committed to an ambitious turnaround plan, which foresees some growth, but mostly margin expansion, financed by factoring and non-core asset sales. Efforts are now being hit by a slow-down of volumes in Europe (50% of revenues), due to uncertainties in the migration to EVs, low consumer confidence, and potentially, tariffs on imports to the US (from Europe and from Mexico). 

- Management seems competent, but we are sceptical they will achieve their turnaround targets at this pace.

- Liquidity seems minimal, although propped up by successful asset sales - for now. A liquidity event is not out of the question next year and just how far the family can support the business is not clear.

Key Value Drivers:

- Lower CapEx requirements as new models are being postponed

- Potential new contracts to Chinese OEMs producing in Europe, or JVs with their suppliers coming to Europe.

- Profitability: 7% EBITDA margins are very low and even an automotive supplier (and of this size at any rate) should be able to make close to 10%. On €5bn of revenue that would add €150m of cashflow. Further non-core asset sales to finance the turnaround. 

- Long-term, the car interior will become ever more important and Antolin's Technology Solutions are aimed at that growth. 

- All major creditors are pari passu, allowing for a homogenous front to face a family that appears to be conscious of the leverage.

- Clarity from the European Commission: The auto industry is hoping the EC will relax its 2035 targets and consequently isn't doing much towards them. Clarity in either direction would help everyone.

Key Risks:

- Limited liquidity: The revolver is significantly drawn and headroom including short-term overdraft lines has shrunk to €125m. We are expecting some €80m of collections from asset sales to boost cash.

- Lower production volumes in Europe, while OEMs are navigating the uncertainties around EV migration, tariffs and low consumer confidence. While Asian OEMs are growing, they make only 8% of sales.

- Slow turnaround: Management are working on it, but we have so far not seen the results. We do not know how many more non-productive assets Antolin can sell accretively to fund the program.

- High customer concentration: VW, Stellantis and Ford make up for 50% of sales. JLR, BMW, Mercedes and GM take the total to over 75%. Any problem with a customer is sudden death for the cap stack.

- Raw materials prices: Antolin estimate it is exposed to 50% of the increase in cost of raw materials which might have a negative impact on its financials.   

- We have no information but assume that the family does not have the liquidity required to support the group.

Looking forward to discussing this name with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk