Standard Profil - Clear road ahead.
All,
Please find our updated model here.
The Company continues to make slow progress on improving its Gross Profit and EBITDA levels, building on order wins recorded over the last couple of years. The high yield market has changed tact on the name, talking up the bullish view of an imminent refinancing. We remain consistent in our view that these recent numbers, and previous quarters, all contribute to an improving business with marginal deleveraging expected over the coming years. We have some reservations on the ability of the Company to break out of its €70-90m EBITDA range and were surprised management have projected this early in the year a €87-92m range. Maybe with a refinancing in mind.
Investment Rationale:
- We continue to maintain our 5% position we took in March 2022 at 80%. In December we highlighted the fact that we had expected further upside and that the bonds should trade inside 15%. With the market rally, and modest improving numbers, the bonds at 93% offer 10.5% YTM (May 2026).
- We don’t share the enthusiasm of the market for an early refinancing, especially with a new CFO having just started, refinancing talks towards the end of the year are highly possible. Yield to take out by 30th November increases to 22% and although not our base case, we see this as something with a relatively high possibility. Take-out in May 2025 is c.15%, our base case assumption.
- Downside centres on the lack of cash deleveraging - with the vast majority of the deleveraging coming 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.
- With limited debt ahead of the bonds and current purchase multiple c. 3.1x, bond recovery should be relatively high.
- 10.5% yield to maturity compensates investors for the current lack of cash deleveraging.
Recent Trading:
- An improving Gross Profit margin driven by further efficiencies has led to higher EBITDA. This was also aided by slightly higher volumes making the results a continuation of the improving operations at Standard Profil. Operationally, the outlook is rosy, with Standard Profil likely to outgrow the market due to numerous new product launches.
- Q1 is seasonally the weaker quarter, with wage inflation rising before subsequently being absorbed by pass-through contracts. Q1 saw an increase in wages, but this was more than compensated by lower raw material and energy costs.
- Standard Profil are in the process of transferring some other operations from Spain to Morocco further lowering their fixed cost base.
Refinancing:
- The Company fielded several questions on the Q&A about a refinancing and didn’t exactly deny the prospect of an imminent refinancing, quoting the significant number of auto-related issuers that have been in the market during 2024 and the strong performance of the sector within the broader market.
- However, with a new CFO having just joined the Group on June 1st, we don’t see any refinancing this side of the summer recess. A refinancing in the Autumn is possible, depending on market conditions, but we still favour a refinancing post-FY24 numbers in early 2024.
- Using our modest projections, leverage would fall to c. 3.0x by FY25, with the business generating c. €33m of FCF before interest. Assuming an 8-10% coupon, with 1.5x interest coverage, recovery solely from a new bond would range from 90-100%. 2.x interest coverage would result in 70-85% recovery.
- This is a downside scenario and ignores any recovery from ownership of the business. OEM suppliers should trade north of 3.0x to give a 100% recovery, but this quick analysis highlights the difficulty the Company faces.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk