巴克莱-美股-汽车与汽车零部件行业-美国汽车与汽车零部件行业：后周期汽车零部件LBO是可能的-2019.9.5-34页.pdf

Equity Research 5 September 2019 FOCUS Barclays Capital Inc.and/or one of its affiliates does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST CERTIFICATION(S)AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 25.Restricted-External U.S.Autos&Auto Parts Late cycle auto part LBOs are possible LBOs could provide a floor to valuations.Investors have begun to take note after the announcement of two deals this year(Magnetti Marelli and Tower)seems to belie common wisdom that its too late in the cycle for take private transactions.Using a back of the envelope LBO framework,we see the greatest potential in AXL.Late cycle auto parts deal history is less bad then investors think.Auto parts dont meet many of the common criteria for LBOs and public investors(and we think PE sponsors)point to late cycle deals from the mid-2000s as proof that auto parts LBOs wont work.But two the of deals(Dana and Tower)appear to have eventually attractive IRRs even in the face of the Great Recession,and another set of transactions(the rollup of metal forming into HHI and Metaldyne)was highly successful.Some key success factors that emerge include a)buy cheap(of course),b)think about platforms to buy even cheaper later,and c)have follow-on funds available for bolt-on/debt buyback.First-cut screen for companies to evaluate further.Using a screen of a)equity market cap$3bn and b)stock price under 50%of one year high,yields 4 companies to examine in more depth:AXL,DLPH,GTX and ADNT.AXL cash flows make it the most promising candidate.We examine AXL,DLPH,ADNT and GTX for potential returns both in a base case as is,base case with asset sales,and a downside recession/recovery scenario.To examine the LBO,we created back of the envelope LBO models for each supplier.AXL may be the best all-around candidate for a takeprivate transaction,largely due to its strong cash flow generation(which is still strong despiterecent missteps).Returns could be enhanced further by selling parts of theMetaldyne business it acquired,even if for less than what was originally paid.Conversely,weak cash flows at DLPH make it less attractive as an as is target although if a quick sale of its electronics businesses could be done,IRRwould become attractive(even with a low exit multiple of 3.0 x on the remaining ICE business).ADNT may offer attractive returns,but high leverage on consolidated EBITDAmakes a transaction less likely.Our analysis also highlights the drag from thecash burn at SS&M which means value would be enhanced even if ADNThad to pay a new owner(say$300mn)to take over parts of SS&M.GTXs strong cash flow generation(which also supports higher initialleverage)could make it an interesting target,even with multiple derating dueto concerns about ICE longevity.Although with a focused portfolio,we do notsee the potential for asset sales and its spinoff lockup extends until April 2020.INDUSTRY UPDATE U.S.Autos&Auto Parts NEUTRAL Unchanged For a full list of our ratings,price target and earnings changes in this report,please see table on page 2.U.S.Autos&Auto Parts Brian A.Johnson+1 212 526 5627 BCI,US Steven Hempel,CFA+1 312 609 7260 BCI,US Jason Stuhldreher+1 312 609 8183 Jason.S BCI,US Barclays|U.S.Autos&Auto Parts 5 September 2019 2 Summary of our Ratings,Price Targets and Earnings Changes in this Report(all changes are shown in bold)Company Rating Price Price Target EPS FY1(E)EPS FY2(E)Old New 04-Sep-19 Old New%Chg Old New%Chg Old New%Chg U.S.Autos&Auto Parts Neu Neu Adient plc(ADNT)OW OW 21.05 29.00 29.00-1.38 1.38-2.90 2.86-1 Delphi Technologies PLC(DLPH)OW OW 13.03 23.00 23.00-2.75 2.75-2.96 2.91-2 Garrett Motion Inc.(GTX)EW EW 10.00 16.00 16.00-3.93 3.94 0 4.73 4.74 0 Source:Barclays Research.Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.FY1(E):Current fiscal year estimates by Barclays Research.FY2(E):Next fiscal year estimates by Barclays Research.Stock Rating:OW:Overweight;EW:Equal Weight;UW:Underweight;RS:Rating Suspended Industry View:Pos:Positive;Neu:Neutral;Neg:Negative Valuation Methodology and Risks U.S.Autos&Auto Parts Adient plc(ADNT)Valuation Methodology:Our PT of$29 is based on a 4.3x EV/EBITDA multiple applied to FY2021E EBITDA ex equity income of$875mn and a 7.0 x P/E multiple applied to our FY21E EPS of$4.18.We apply a 50%weighting to both.Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target:Factors that could affect our investment opinion,price target and earnings estimates include,but are not limited to,fluctuations in foreign currency exchange rates,expected levels of industry light vehicle production,the federal funds interest rate target,and price concession agreements with auto manufacturer customers as well as changes in unionized labor agreements and awards and/or losses of major customer contracts.Risks specific to our ADNT outlook:(1)The failure to raise margins in the companys metals operations;(2)Greater-than-expected pricing pressures in the China seating and interiors markets;(3)Lower-than-expected savings from SG&A cost reduction initiatives.Delphi Technologies PLC(DLPH)Valuation Methodology:Our$23 price target is based on a 7.7x P/E multiple applied to our 2020E EPS of$2.91.Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target:Factors that could affect our investment opinion,price target and earnings estimates include,but are not limited to,fluctuations in foreign currency exchange rates,expected levels of industry light vehicle production,the federal funds interest rate target,and price concession agreements with auto manufacturer customers as well as changes in unionized labor agreements and awards and/or losses of major customer contracts.Risks specific to our DLPH outlook:(1)The inability to design and secure meaningful new business associated with the companys power electronics unit;(2)Brexit-related impacts(approximately 15%of DLPHs net sales are generated in the UK).Garrett Motion Inc.(GTX)Valuation Methodology:Our$16 price target is based on a target EV/EBITDA multiple of 5.5x applied to our 2020E EBITDA estimate of$635mn.Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target:Factors that could impact our investment opinion,price target and earnings estimates include,but are not limited to,fluctuations in foreign currency exchange rates,expected levels of industry light vehicle production,the Federal Funds interest rate target,and price concession agreements with auto manufacturer customers as well as changes in unionized labor agreements and awards and/or losses of major customer contracts.Source:Barclays Research.Barclays|U.S.Autos&Auto Parts 5 September 2019 3 Summary With auto parts companies trading at depressed valuations,we wanted to examine if the LBO market could provide a floor on otherwise ugly share prices.Despite auto parts having an(undeserved,as we will show)reputation as unattractive for LBOs,public investors have begun to take note after the announcement of two deals this year(KPS/Tower International and KKR/Magnetti Marelli)that seem to belie common wisdom that its too late in the cycle for take private transactions.Late cycle auto parts deal history is less bad then investors think and some key success factors are apparent.Admittedly,auto parts dont meet many of the common criteria for LBOs(stable cash flows,etc).Public investors(and we think private equity sponsors)point to late cycle deals from the mid-2000s as proof that auto parts LBOs wont work.But two the of deals(Centerbridge/Dana and Cerberus/Tower)appear to have eventually attractive IRRs even in the face of the Great Recession,and another set of transactions(the rollup of metal forming into HHI and Metaldyne)was highly successful.Some key success factors that emerge from the deal history include a)buy cheap(of course),b)think about platforms to buy even cheaper later,and c)have follow-on funds available for bolt-on/debt buyback.Recent LBO announcements have kindled interest.Two recent auto parts LBOs(KKR/Calsonic/Magnetti Marelli and KPS/Autokinikon/Tower)have led investors with whom we talk to wonder if the bias against leveraged transactions in OEM auto parts space is beginning to dissipate.While it is hard to generalize from the Magnetti transaction(as it involves two former captive suppliers with little geographic overlap,and is financed with Japanese bank debt),the proposed Tower International transaction does offer,in our view,insight into the potential around some of our parts companies.While Autokinikon is paying a 70%premium,the standalone economics appear attractive,and likely improve with synergies with their first acquisition(L&W)and a potential as a platform for consolidation in the next cycle First-cut screen for companies to evaluate further.Using a screen of a)equity market cap$3bn and b)stock price under 50%of one year high,yields 4 companies to examine in more depth:AXL,DLPH,GTX and ADNT.Deep drive into AXL DLPH,ADNT and GTX for potential returns.To examine the LBO potential for the four parts suppliers(AXL,DLPH,ADTN and GTX),we created back of the envelope LBO models for each supplier.In addition,the model helps to highlight key challenges and opportunities for each firm when they are viewed through a cash generation lens.Our key findings are that AXL may be the best all-around candidate for a takeprivate transaction,largely due to its strong cash flow generation(which is still strong despite recent missteps).Returns could be enhanced further by selling parts of the Metaldyne business it acquired,even if for less than what was originally paid.Conversely,weak cash flows at DLPH make it less attractive as an as is target although if a quick sale of its electronics businesses could be done,IRR would become attractive(even with a low exit multiple of 3.0 x on the remaining ICE business).ADNT may offer attractive returns,but high leverage on consolidated EBTIDA makes a transaction less likely.Our analysis also highlights the drag from the cash burn at SS&M which means value would be enhanced even if ADNT had to pay a new owner(say$300mn)to take over parts of SS&M.Barclays|U.S.Autos&Auto Parts 5 September 2019 4 GTXs strong cash flow generation(which also supports higher initial leverage)could make it an interesting target,even with multiple derating due to concerns about ICE longevity.Although with a focused portfolio,we do not see the potential for asset sales.Myriad reasons why LBOs for OEM auto parts have been rare In many other sectors,the possibility of an LBO from a financial sponsor provides a floor valuation for public market valuations.In our view,one reason that many auto parts companies trade at multiples not only below the market but below other cyclical industrials is the lack of LBO activity in the space.FIGURE 1 Auto parts multiples vs.market Source:Eikon,Barclays Research We believe there are two key reasons why sponsors eschew auto parts,especially at this point in the cycle Auto parts do not meet the textbook criteria for LBO targets Some high profile deals from the mid-2000s(that is,late cycle)are perceived(arguably incorrectly)to have performed poorly Auto parts dont fit textbook LBO criteria First,on the positive side,auto parts would meet some of the typical LBO sponsor criteria Mature industry.Cheap valuations as shown in Figure 1,auto parts FCF yields are significantly higher than most other sectors Potential for operating cost reductions However,auto parts are often ignored by sponsors as the companies dont meet most of the well-established elements of the LBO sponsor checklist.These include:Cyclical cash flows Price down pressures.Exposed to competitive pressures from OEMs and irrational competitors.The potential for operating cost reductions is(depending on the part category)offset from continual and mounting pricedown pressures from OEMs on existing contracts,and pressure on RFP bids from desperate competitors seeking to fill capacity.17.5x13.2x5.4%7.3x5.4x7.6%Forward P/EForward EV/EBITDAFCF yieldS&P 500Auto partsBarclays|U.S.Autos&Auto Parts 5 September 2019 5 Lack of liquid market for asset disposals Lack of active sponsor market for exits High capex and working capital requirements Concerns over terminal value in powertrain exposed business Mixed but better than perceived results from late cycle deals from mid-2000s At this point,autos are 10 years into a rising/plateaued SAAR environment much as they were in 2005(14 years of SAAR growth/plateau).With auto parts(and OEMS)cheap at that time,and LBO firms searching for new opportunities,a few high-profile auto deals were struck that are perceived(perhaps unfairly)by public market investors as either not successful at worst,or at best,ones in which sponsors had to wait years for an exit.These included Cerberuss purchase of Chrysler stands out in most of our conversations with investors as proof that late cycle LBOs are unlikely to be successful.Cerberus purchased Chrysler in 2007 for a total of$7.4bn,with$1.35bn paid to Daimler,$5bn for improvements to the automotive unit and$1bn for the finance arm.Cerberus reportedly did not take on debt to fund the transaction1 Cerberus lost its stake in the automotive company in the 2009 bankruptcy.2 However,it retained ownership of Chrysler Financial,which it sold to TD Bank in 2010 for$6.3bn for the loan book,while retaining auto insurance and other units worth$940mn,leaving it close to whole on the overall Chrysler investment 3.Tower International Cerberus purchased Tower International,a maker of light truck frames and body parts out of bankruptcy in 2007 for a total of$1bn4,of which$213mn was equity5.Tower returned to the public markets in 2010,and Cerberus began exiting its position in 2013 for proceeds of at least$300mn.While the return on the initial equity might have been unappealing,Cerberus owned$403.9mn of Tower first-lien debt as of Dec.31,2009,6 which was refinanced at par in 2011.If Cerberus had bought the debt during the financial crisis at a discount(say 50%of face)the debt transactions could add$200mn to the recovery.In addition,Tower paid Cerberus$68mn in Dec 2007 after the sale of its interest in Metalsa,and paid$14mn of distributions between 2007 and 10.We estimate about 15%IRR on the equity component(with the quick sale of Metalsa helping)and 23%in total,assuming the distressed first tier debt was trading at 50c on the dollar as Cerberus acquired its stake.Dana Centerbridge provided$250mn of exit financing(for Class A preferred shares)for Dana as it left bankruptcy in 2007,and began to execute a turnaround plan focused on driving manufacturing eff