Antolin - Not Consulted
All,
Please find our updated analysis of Antolin here.
While risks in the short term are skewed to the downside, the bonds are difficult to short into a H225 picture that has been obscured by recent management commentary. Any intelligrence on the nature of the announced series of “transactions” would potentially be decisive for our next position. Meanwhile, we have a few theories.
Investment Considerations:
- We don't currently hold a position in the bonds after we closed out our short earlier this year. Fundamentally, we find the bonds overvalued around 70c/€, but they ate expensive to short and the outlook for the year is muddied by the unspecific announcement of a "series of transactions" in H225, pursuant to which Antolin apparently won't default on its otherwise unattainable leverage covenant in Q225. The market would be informed when these transactions take effect. That sounds scarry, but perhaps its positive.
- The low profitability does not allow for much debt carrying capacity at present, so liquidity is key to avoid a trigger. Non-core assets, which have so far funded the turnaround plan, are slowing down. But two years in, we can only identify approx. 1% margin uplift. Antolin needs another 2-3%. So while the bonds are expensive to short into the uncertain outlook of H225, they are not yet a long either.
- We are expecting the series of unspecified transactions to address the Sr. Facilities covenants, but judging by their last employed language, at least S&P should be downgrading the bonds anyway. On the other side of that downgrade and once we gain conviction (H125?) that the company can continue to fund its operations and turnaround, the bonds would become attractive.
- The bonds are trading with 20% YTM for good reason. If liquidity tightens or the "transactions" disappoint, they could quickly revisit the low 60s on account of their limited debt carrying capacity, a level tested earlier this year (See Recap Table). However, the bonds are trading this high only because they are expensive to short here. They could fall faster than they'd rise on positive news. Fundamentally, we currently see a recovery value of only 70c/€, which includes a portion of equity which we would not want to pay for. This valuation should grow, but again, we are not inclined to pay for that yet.
- So Antolin is an opportunity to sell into a weak Q225 and a series of transactions that apparently do not consult the bonds, as well as into a S&P downgrade and ultimately into a restructuring. Fundamentally, management have been hard at work to raise margins and if liquidity holds up (thin, but our base case for now) some of that should become visible before stakeholders must sit down.
- In the short term, Q225 results have already been flagged as less than inspiring, leaving little to be bullish about until these unspecified transactions are announced.
Key Conclusions:
- Q1 2025 results offer tentative signs of a turnaround: improved Gross Margins (via supply contract renegotiations) and lower Staff Expenses. However, Q2 is expected to be weaker due to Easter timing and U.S. demand adjustments following April’s new tariffs. In that context, management has alluded to "transactions" planned for H2 2025 / H1 2026, without providing specifics. Otherwise, FY guidance appears credible, if insufficient to support a balance sheet refinancing (See Current Trading).
- Base case models stable sales and no material tariff impact beyond temporary demand softness in Q2–Q3 2025. A 2.5% EBITDA margin uplift to industry norms would enable refinancing, but there is still insufficient evidence that management’s plan is achieving this. Meanwhile, CapEx at 5% of Sales is typical for the sector, but due to the weak EBITDA margin in the first place, weighs particularly heavy on Antolin’s cash conversion. On a normalised basis, Antolin generates minimal FCF, and interest costs are currently unfunded—leading to rising leverage (See Model).
- EV/EBITDA multiples remain depressed vs. peers due to persistently low profitability and poor cash conversion. Competitors operate at 9%+ margins—Antolin’s stated goal since the 2017 Magna acquisition—but there’s been little observable progress. A peer-level valuation would require ~35% more sales, or €150m in cost cuts—neither of which is guided (See DCF).
- While all creditors are legally pari passu, operational dependencies mean the RCF and working capital lines - and the TLA where from the same banks - are functionally senior and Antolin could attempt to prioritise these. To avoid subordination, bondholders might need to arrange alternative bank support. RCF/TLA priority would wipe out the bonds (See Debt Carrying Capacity, Comps and Recapitalisation).
- As regards operations, Asia is modestly profitable but small and only partly owned. Core issues are in North America, where labour cost poses a problem for the entire sector. Tariff risk is overstated: 14 U.S. and 10 Mexican plants operate with regional customer alignment and ~70% U.S. plant utilisation, providing flexibility to shift any production, if required. Overall, customer concentration remains dangerously high. Any disruption with VW or Stellantis poses existential risk and probably limits Antolin’s pricing power (See Company).
Recent Trading:
- Q1 results were boosted by Easter falling this year into Q2, vs. last year into Q1. Q2 is therefore expected weaker, but also due to sluggish demand following the introduction of US tariffs. EBITDA beat our estimate by €7m. Also, one-off adjustments have come down and CapEx was visibly more prudent than previously.
- Management maintained guidance, specified a credible 9%-9.5% IFRS 16 EBITDA margin for the year and signalled that they do not anticipate to breach covenants. In light of our projections that cannot be achieved without a deleveraging transaction. When prompted, management signalled it is working on a series of transactions in H225 and H126, which would be communicated when becoming effective. We therefore conclude these are financing or investment transactions that do not require the input from bondholders. We expect these transactions to avert a covenant breach and preserve liquidity, but not to benefit bondholders a priori.
- Tariffs, should manifest themselves mostly in demand volume, rather than Antolin directly paying tariffs on exports into the US. At 70%, US plant utilisation is low enough to absorb any incremental shift of volumes to the US.
- Gross Margins improved visibly to 36% in Q1. Management referenced renegotiated purchasing contracts, but cautioned not yet to extrapolate the effect.
- Margins were driven by a decline in cost of supplies of nearly 7% based on strategy and negotiations with top suppliers.
- 8% decline in staff costs in Q1. After -13% reduction in labour cost in 2024.
- Revenue of Product Systems are down primarily due to the €56m of assets sold. Antolin sold another €12m YTD and a further €18m are planned for the rest of the year. Meanwhile the decline in Tech Solutions causes a margin increase due to better product mix.
- Recent press speculation that the Spanish government might provide funding for Antolin would be within Spain's normal programs and not constitute any particular attention paid to the automotive supplier.
- Management expects liquidity stable over the coming quarters.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk