Standard Profil - avoiding the potholes
All,
Please find our initiation on Standard Profil here.
From issuance at par less than a year ago to current levels of 80c, investors in Standard Profil have hit many potholes. The Company is getting hit from all angles: raw material prices increasing year-over-year, OEM production disrupted, initially by semiconductor chip shortage and now by disruption to Ukrainian suppliers. While there remains some uncertainty surrounding OEM output, we remain confident that the trajectory of OEM production in FY22 and beyond will improve and improve Standard Profil’s profitability. There are many concerns in relation to raw material inflation, and although we don’t dismiss it, the main focus needs to be on OEM production levels. Raw material increases are partially mitigated from pass-through contracts, and although we expect a lower contribution margin, the success or otherwise of Standard Profil will be driven by overall production levels. At current levels, with limited debt ahead of the HY bond, the bond yields 13% and offers attractive buy-in price and yield. We see further upside from increased market share Standard Profil should experience in FY22 on the back of new platform wins in FY20 and FY21.
Macro picture:
- Standard Profil are 100% reliant on OEM sales to drive revenue. FY21 was severely impacted by the shortage in semiconductor chips but as supplies start to free up, OEMs and the industry, in general, are becoming more bullish on improving volumes in FY22, especially in H2.
- The other impact in FY21 and will follow on to FY22 is raw material price increases. Standard Profil is a price taker on raw materials, and with their main costs linked to oil prices (carbon black and EPDM), there is unlikely to be any relief during FY22.
- Due to the increase in raw materials, Standard Profil had to renegotiate with its OEM customers to seek to pass through some of the inflationary price movements. Historically, only 20-25% of their contracts with OEMs would have pass-through mechanisms, but post renegotiations, they now operate with over 70% of contracts having a form of pass-through.
- It should be noted, however, that the pass-through contracts are not for 100% pass-through. Standard Profil uses the term “pain-share” but has not communicated with investors the level of pass-through they have achieved.
Model:
- Our model takes the LMC expectation for FY22 global production figures as the basis for revenue and EBITDA calculation. We expect Standard Profil to gain market share during FY22 as new platforms come on board, leaving upside to our model.
- The main item we focus on is the contribution margin per vehicle supplied Standard Profil generate. We expect, because of not achieving 100% pass-through of raw materials, that Standard Profil’s contribution margin will still lag behind the FY18-FY20 range, although should show some improvement on FY21.
- Although we expect an increase in raw materials, w
- A word of caution is required concerning the working capital swings expected for the Company in FY22. As a new issuer, there are only 5 quarters of balance sheet data and given all the issues in FY21 re: disrupted supply and order cancellation, we are not confident that FY21 is representative of the underlying business. When we have spoken to management they advise that our working capital outflow in Q1 and FY22 is too high, although we have not been shown an error in our calculations.
Liquidity:
- Standard Profil finally arranged an RCF facility, signing it in February 2022. Under the terms of the HY bond, there was a carve-out for a super senior RCF since the time of the bond (April/May 2021). The delay in securing the RCF did lead to some nervousness among investors, especially concerning the underlying business.
- The Company still has a factoring facility, which is linked to their overall sales levels. It is currently underutilised, but the overall facility size is c.€40m.
- In our model, we have fully drawn down the RCF facility in Q2 22, but not increased the utilisation of the factoring lines. In reality, Standard Profil is likely to draw down the factoring line, and management has guided them to not use the RCF facility in the foreseeable future.
Ukraine conflict:
- The conflict in Ukraine has caused oil prices to rise substantially, and this, in turn, has put further pressure on raw materials. The impact of raw materials has been mitigated due to new pass-through contracts, but Standard Profil will be impacted by their share of any “pain-sharing” agreement.
- Of more concern, is the knock-on impact of other OEM supplier disruptions. We are already seeing in Europe the impact of the closure of Leoni’s wire factories in Ukraine is having on OEM production levels. Delivery bottlenecks have already led to production disruption at BMW and VW’s European plants and any disruption will impact Standard Profil’s top line.
Positioning:
- We have taken a 5% long position in Standard Profil at 82%. Our bullish stance is based on the overall macro picture and an ability to pass through some of the raw material prices increases Standard Profil are experiencing. The limited drawn debt ahead of the HY bond gives us comfort and although we don’t envisage a return to FY18 & FY19 EBITDA levels in the near term, post-Q1 22, EBITDA numbers should show incremental improvement.
- Buying at current levels, we are creating EV at 6.0x a depressed EBITDA. We expect a rebound in EBITDA beyond FY22 as OEM volumes return to normal. OEM suppliers have historically traded in a 4.0-6.0x range, and although we expect this business to be at the lower end, EBITDA should improve in FY23 and beyond.
- There are no upcoming maturities, and the concerns surrounding Standard Profil not having sufficient liquidity to withstand the current raw material prices are exaggerated. The Company has unused factoring lines and a newly created €30m RCF facility.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
M:+44 7786 705 806
www.sarria.co.uk