Standard Profil - re-evaluate the situation - Positioning
All,
Please find our updated model here.
Standard Profil reports a 6.6x net leverage (or 8.8x pre- IFRS 5 EBITDA) leaving investors querying the next turn. The business has plenty of time with no maturity until 2025, amble time for the business to take advantage of its order book and in turn grow its EBITDA and cash generation. However, there still remains continuing cost inflation pressures and cash burn over the coming quarters. aking into account this growth, along with continuing cost inflation and cash burn over the coming quarters, are the bonds attractive in the 50-60% range? We re-evaluate the situation and update our model with Q2 results.
The conference call is on Tuesday the 6th at 1pm.
The crux:
- We have modelled the inflection point for Standard Profil to be early FY23 as the business continues to deal with increases in raw material prices partially offset by pass-through agreements negotiated with their OEM customers. Nothing in the Q2 numbers changes our view. The overall credit market has deteriorated since we entered this name.
- We had expected the Company to draw down on its RCF, but instead the Company has marginally increased some local borrowings and maintained its liquidity cushion. With no upcoming maturities until April ’25 (the undrawn RCF), bondholders have limited concerns re: liquidity.
- Energy and raw materials inflation are widespread concerns for HY issuers currently, but it should be noted that Standard Profil benefits from passthrough contracts. Labour cost is the most significant portion of the COGS cost line, at 35% after raw materials which are c.50%. Other production costs, including energy were 12%.
Order book/revenue:
- The CAPEX investment and order book wins from previous years are starting to have an impact on Standard Profil’s numbers. The order book continues to grow, with a further increase in new orders recorded in Q2, in line with the €20m average win over the last 6 quarters. This overall order book has increased by 25% since Dec 2020, although some of this is revaluing previous orders to account for the revised pass through agreements arranged with the OEMs. The order book will be further increased by more recent price increases agreed with OEMs.
- BEV platforms account for 66% of the new orders, and in turn this has increased the BEV share to 38% of the overall order book size.
- The impact of BEV vehicles is evident in the regional sales numbers, with Chinese region doubling its revenue in Q2 on the back of production uplift in Tesla’s Model Y. In addition, the increase in North American sales (Mexico) is also driven by BEV production figures.
Margins:
-The other side of the coin is margins continue to be squeezed, despite pass through agreements. Standard Profil have agreements on cost compensation mechanisms on 94% of projected FY22 sales, although most of this will impact H2 margins. Cost of Sales increased in line with Revenue, as a result of increase in raw materials and energy prices.
- On the plus side, staffing costs and scrap costs decreased due to higher volumes and more efficient processes.
- The result is that Q2 EBITDA is c.€1m lower than Q2 ’21, despite the 20% increase in top line revenue.
Liquidity:
- The Company has continued to have sufficient liquidity, including its €30m undrawn RCF facilities. Standard Profil has €88m of availability including €38m of cash. The blocked cash has reduced to €200k from €4m at year-end. This is after an increase in CAPEX and the negative impact of raw material prices resulting in an outflow of c.€9m in Working Capital.
Outlook:
- We are likely to get further details on H2 during the conference call next Tuesday (6th at 1pm UK time) but with further cost pass through expected as a result of H1 negotiations and the low Q3 ’21 comparable, the outlook is likely to be favourable.
- Further backing this up is the strong order book.
Downside:
- It should be noted that even with volumes increasing in FY23, we continue to model the business to be cashflow negative in FY23. Our FY23 EBITDAR is c. €71m, which after CAPEX of €48m interest of €20m, €6m of rent, and some investment in Working Capital due to higher volumes the business will remain cashflow negative.
- Our expectation for FY23 EBITDAR margin is c.15%, which is below FY18-20 of c. 20%. However, unless raw material prices fall significantly, we believe Standard Profil will have to reduce margin to increase its volume. With current expectations of increased OEM volumes, this should drive revenue and EBITDA improvement, but it is difficult to model any significant positive cashflow in the short term.
- But we remain comfortable with Standard Profil’s liquidity profile and with no upcoming maturities, the business has time to benefit from its cost saving plans and increase in order book.
Positioning:
- We continue to hold our 5% long position in Standard Profil's Senior Secured bond. At current prices it generates a 11% running yield and despite the supply issues at OEMs and commodity inflation, we envisage an improving EBITDA over FY22, with leverage reducing to 6.0x IN FY23 on our conservative model.
- We don’t see the bond price staying in the 50-60 range and with an expectation that upcoming quarters will improve sequentially, we are increasing our position to 5% of NAV.
- At current levels, we are creating the EV at 5.0x a depressed EBITDA. This is a favourable buy-in price versus historic OEM supplier valuation range. The business is expected to be 5.0x leveraged on our conservative model prior to a refinancing in FY26.
- Despite negative cashflow over the short term we do not envisage any need for fresh capital, and therefore expect the bond to move up out of the 50-60% range to a mid-teen yield. At 75%, the yield is 16% which is more appropriate for the risk profile.
Happy to discuss
Tomás
E: tmannion@sarria.co.uk
M:+44 7786 705 806
www.sarria.co.uk