Standard Profil - Stuck waiting for help
All,
Please find our updated analysis here.
After two profit warnings this year, the bonds have gone into freefall, quoted at c.40% in the last couple of weeks. The quantity of the profit warnings has taken us by surprise, especially the top-line revenue. This decline is greater than the decline in OEM production and those seen by other OEM suppliers.
Investment Rationale:
- We maintain our 2.3% long exposure in the bonds, originally taken in March 2022 at 80%. With bonds trading at 40%, we have missed the opportunity to exit our position.
- There is likely to be a vacuum of news until the PWC Independent Business Review is completed, which is expected in January. There will be a new money requirement, and our initial view this will not be provided by the shareholder. These factors, combined with two profit warnings, have led to the bonds to be in freefall.
- We remain cautiously optimistic bondholders will recover significantly more than current levels. Upside is c.40pts on the back of a small equity raise and OEM production levels returning to some normality in H2 25.
Valuations:
- We calculate an EV of c. €300-350m based on a recovery in OEM production levels in H2 25, and into FY26. Our model is not based on Standard Profil improving its revenue or EBITDA beyond those seen in FY23, which would further boost the EV.
- Theoretically this implies the bonds are fully covered, but with a cash requirement likely recoveries will be lower.
- On an affordability basis, using a 1.5x interest coverage ratio, Standard Profil could re-instate c. 35% of the current outstanding bonds using FY25 projections. This would increase in line with our projections and Using FY26 expectations, there is no need for any haircut. Note FY26 numbers are still lower than FY23 historics, demonstrating the volatility in Standard Profil’s earnings, depending on OEM production levels.
- Standard Profil supplies the OEM with products with very short lead times. The recent decline in top-line revenue appears excessive given overall OEM production numbers but we don’t expect Standard Profil has lost market share. In fact, we expect that Standard Profil has increased its market share which is evident from recent order book wins.
Outstanding Questions:
- We are having a debate internally on the magnitude of revenue decline visible and expected in Q3 and Q4 FY24. To put in context, Standard Profil is now projecting Q4 ’24 revenue to be down 25% over Q4 ’23 and for FY24 to decline 10% versus prior year. We don’t believe this is due to destocking and view Standard Profil to be closer to a JIT supplier. This level of decline is not visible in other auto suppliers and doesn’t compute with broader OEM production numbers. We are examining this further with potentially other OEM suppliers remain over optimistic about Q4 and beyond.
- How much implicit support is provided by the OEMs at the current time. The level of receivables has reduced marginally (less than €10m) but not significantly, especially in the context of the lower revenue numbers. The Company has increased its use of factoring facilities which would imply they have not asked their OEM customers to pay quicker.
Profit Warning:
- Standard Profil has issued two profit warnings this year, the first in July, with a subsequent reduction in guidance issued in the Q3 release. The new guided EBITDA(R) for FY24 at €55-58m range down from €87-92 issued as recently as May of this year. More importantly, revenue is down from the May guidance of excess of €500m to the current expectations of €450-460m, implying a 10%+ fall in revenue.
- The Operational leverage is not surprising to us, given the increase in OEM downward adjustments to orders over the last couple of months due to uncertainty. However, the top line reduction of 10%+ is, especially in the context of recent contract wins achieved by Standard Profil in recent years.
- Although the Company continues to attempt to reduce costs further, Standard Profil's ultimate success depends on OEM orders.
Order Book:
- The main premise of any bullish position on Standard Profil centres on its order book, which has doubled since 2019. The majority of the increase is in 2022 and 2023.
- Renegotiated prices, which happened in early 2023, will partially account for the increased order book. However, adjusting for this impact, the order book has increased from 6.0x LTM revenue to c. 8.0x LTM revenue.
- This is most visible from the split in the order book between electric and non-electric vehicles. In Q1 2022, 35% of the order book, c. €900m was for electric vehicles. Electric vehicles now account for 60% (€2.2bn). The non-electric order book has remained relatively stable over the period, at €1.6bn.
- These order wins are reflected in the growth CAPEX spent by Standard Profil since December 2021. Standard Profil generally spends c. €11m of CAPEX a quarter, with 60% or €28m p.a. on growth CAPEX. Standard Profil has spent €10m p.a. on R&D and even in Q3 this figure has not been reduced.
OEM support?
- First, it should be noted that OEMs tend to have only one supplier per model for sealings solutions, with OEMs working exclusively with the supplier to research and produce the seals.
-Sealing solutions are a small component of an OEM’s cost base. Standard Profil’s LTM revenue from VW and Tesla is c.€90m, followed by Ford at c.€50m and Audi at €40m. However, OEMs will have worked solely with Standard Profil on specific models, it is not in OEMs interest to see Standard Profil fail.
- At the time of the energy crisis in late 2022, there were several rumours that individual OEMs were going to support Standard Profil. Management at Standard Profil appeared reluctant to take this approach, and eventually, all OEMs (95%+) agreed to renegotiate contracts, allowing pass-through of certain inflated costs.
- We expect no support will be forthcoming for FY24, but Standard Profil may be able to extract some minimum payment terms for FY25 in the context of further uncertainty over production levels.
- We would expect
Will this be enough?
- If overall OEM production levels are maintained at Q3 levels, Standard Profil will run out of cash over the summer next year. This ignores the RCF facility, due to be repaid in April next year.
- The RCF facility has traded into a hedge fund, and expectations are it is unlikely to be renewed. Therefore, the business will require €30m for the RCF and c. €20m minimum to maintain liquidity over the coming quarters. Actera previously contributed €10m in April 2023, but it remains uncertain if they would be willing to contribute further equity.
- Standard Profil has appointed PWC to conduct an independent Business Review, which should be completed by January 2025. This review will be the basis for any discussions with bondholders, so we expect a vacuum of news until then.
- However, any investor looking at the bonds at current levels, must be willing to inject fresh capital to protect its investment.
Timing:
- Timing will be driven by the release of the Independent Business Review in January and the upcoming maturity of the RCF in April. The timeframe is short for any external equity raise even allowing for bondholders having organised with Houlihan Lokey and Milbank both appointed as advisers.
Happy to discuss further.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk