Autoneum Holding AG AUTN SW
June 21, 2011 - 11:11am EST by
utah1009
2011 2012
Price: 84.00 EPS $7.40 $17.05
Shares Out. (in M): 5 P/E 11.1x 4.7x
Market Cap (in $M): 382 P/FCF 0.0x 0.0x
Net Debt (in $M): 133 EBIT 63 136
TEV ($): 515 TEV/EBIT 0.0x 0.0x

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Description

Autoneum Holding AG is one of the best post-spinoff opportunities I've seen in a couple years.  The company is caught perfectly in the crosshairs of all the classic post-spin confusion and unwitting selling.  It changed its name to something that nobody recognizes.  It's a European company while parts of Europe are melting down.  It was spun-off at the beginning of a market downturn that's hit small-cap stocks particularly hard.  It's a cyclical company against the backdrop of some discouraging macroeconomic data.  Its trailing financial results are well below historical norms.  It has a very small float of 3.1m shares.  It has only one sell-side analyst covering it.  This is textbook.

 

Company Overview

 

Autoneum was formerly a business segment of Rieter Holding AG (RIEN SW) until it was spun-off on 5/13.  The stock quickly traded to SFr119 but has barely managed an uptick since, losing 1/3rd of its value since the second day of trading.  Rieter is a Swiss industrial firm that's a well-run, albeit sleepy and uninteresting conglomerate.  They previously had two divisions: Textile Systems, and Automotive.  The textile business sells capital equipment used for spinning and producing yarn (I warned you it was boring).  There isn't much growth in the textile business but it has a surprisingly high ROIC and it generates nice cash flow.  The auto business was entered in the mid 80's and it's grown steadily since.  Management felt the auto business was ready to stand on its own although with spinoffs it's safe to assume that there are other motivations involved.

 

Rieter's automotive business, now Autoneum, is a large player in acoustics and thermal management parts and systems.  What does that mean?  These are various types of covers and panels that are affixed to other parts inside the vehicle.  Behind the dashboard, for example, a car will need a protective layer of synthetic material that dampens engine noise and absorbs heat.  Same thing for the wheel wells, the underside of the hood, trunk, etc.  Autoneum has spent decades working on the materials and design of these parts in order to perform better, reduce weight, and improve cost.  They have 48 plants around the world while sales are 54% in Europe, 33% North America, 9% LatAm, and 4% Asia.  Here's the company presentation which can provide more details about what they sell and to whom, and here's another presentation that goes into some more detail about the spinoff.

 

Financially speaking, Autoneum looks like most other auto part OEM's.  Its sales growth follows vehicle production growth while EBIT margins are in the mid-single digits and ROIC is in the low teens.  Nothing about Autoneum stands out from the crowd, it looks pretty much like what you'd expect, which is to say a typical auto parts OEM whose fortunes generally rise and fall with the industry.

 

In early 2008 Rieter management undertook a broad restructuring of the company.  The moves included shutting down Western European manufacturing plants and moving them to Eastern Europe (cheaper labor, closer to customer plants), layoffs and plant closings in North America, a reduction in corporate overhead, a shift to more temporary workers, and disposal of some smaller non-core businesses.  The result has been lowering the EBIT breakeven point on revenue from about SFr2,000m to SFr1,625m.  The total expense cuts were SFr195m, but importantly only 2/3rd of it has been realized so far.  Management expects the remaining SFr65m to be recognized by the beginning of 2012 (restructuring in Western Europe is notoriously difficult, as most readers probably already know).  I believe these additional expense reductions will play a major role in allowing Autoneum to achieve EBIT margins above their previous average.

 

Financials

 

The company has 4.6m shares outstanding, SFr256m in debt and SFr123m in cash.  Historically, Autoneum had EBIT margins of 5.0% which was below the global auto OEM average of 6.2% and European average of 7.2%.  Margin ranges from company-to-company are surprisingly tight; there are only one or two outliers in either direction.  The value proposition is pretty simple.  If Autoneum returns to historical margins of 5%, which seems like a layup given the restructuring (almost every auto parts OEM has brought margins back to historical levels), it would produce EBIDTA of SFr175m and EPS of SFr12.00.  Comps trade at 6.5x trailing EV/EBITDA (5.4x current year) and 12.5 trailing P/E (11.5x current year).  This would imply that Autoneum is worth between SFr138-175/share for 65-110% upside.  I would call this a base case as it assumes average margins.

 

Where things get interesting is when you factor in the remaining cost cuts of SFr65m, most of which should fall to the bottom line from here on out.  Holding revenue assumptions constant, I estimate EBIT margins would expand to something more like 7%.  While this is above Autoneum's historical average it's by no means a heroic assumption since that's close to every other European OEM margins.  This new margin structure would produce EBITDA of SFr218m and EPS of SFr18.00, implying a fair value of SFr205-225/share.  I forecast revenue growth based on the weighted average sell-side estimates for revenue growth of their customers.  Autoneum's sales are more volatile so while they did worse during the downturn (negative 20-30% sales vs customers negative 7-12%) they should do better during the rebound.  I've only budgeted for them to perform slightly better.

  2006 2007 2008 2009 2010 2011 2012 2013
Revenue 2,179 2,363 1,960 1,387 1,678 1,737 1,910 2,025
Growth 7.3% 8.4% -17.1% -29.2% 21.0% 3.5% 10.0% 6.0%
                 
Expenses 2,084 2,271 2,211 1,503 1,656 1,674 1,775 1,863
                 
EBIT 95 92 -251 -116 22 63 136 162
Margin 4.3% 3.9% -12.8% -8.3% 1.3% 3.6% 7.1% 8.0%
                 
DD&A NA NA NA 94 85 82 82 81
                 
EBITDA NA NA 79 -22 107 145 218 243
Margin     4.0% -1.6% 6.4% 8.3% 11.4% 12.0%
                 
Net Income           34 82 101
EPS           7.30 17.67 21.79

 

EV/Sales is a good sanity check for companies like this.  Autoneum has the lowest multiple I can find and trades at a huge discount to the group average.  Same thing goes for book value.  I wouldn't use book value to determine what a company comprised of specialty assets is worth, but it's nevertheless a good indicator of whether you're in the right ballpark.  Same thing as before, Autoneum trades at a large discount to the group and is again the cheapest company by a considerable margin. 

 

Price/Book

 

EV/Sales

Autoneum Holding AG

126%

 

Autoneum Holding AG

0.31x

 

 

 

 

 

Average

241%

 

Average

0.74x

 

 

 

 

 

GKN PLC

247%

 

GKN PLC

0.74x

Autoliv Inc.

202%

 

Autoliv Inc.

0.85x

Leoni AG

223%

 

Leoni AG

0.48x

Continental AG

221%

 

Continental AG

0.84x

Tenneco Inc.

NA

 

Tenneco Inc.

0.54x

Johnson Controls Inc.

224%

 

Johnson Controls Inc.

0.78x

TRW Automotive Holdings Corp.

266%

 

TRW Automotive Holdings Corp.

0.49x

BorgWarner Inc.

331%

 

BorgWarner Inc.

1.46x

Valeo S.A.

188%

 

Valeo S.A.

0.36x

Michelin

137%

 

Michelin

0.67x

Federal-Mogul Corp.

147%

 

Federal-Mogul Corp.

0.62x

Tower International Inc.

298%

 

Tower International Inc.

0.40x

Faurecia S.A.

364%

 

Faurecia S.A.

0.29x

ElringKlinger AG

288%

 

ElringKlinger AG

1.89x

 

No single competitor is a perfect comp for Autoneum, but ElringKlinger AG (ZIL2 GR) is probably the closest in terms of products and company size.  Somehow they manage ridiculously high margins (mid teens) so I wont single them out.  I confess to only being in the process of figuring out why they are so much more profitable and what additional hope that might spell for Autoneum.

 

 

EV/EBITDA

 

P/E

 

TTM

2011

2012

 

TTM

2011

2012

Autoneum Holding AG

4.8x

3.5x

2.3x

 

NA

10.9x

4.4x

 

 

 

 

 

 

 

 

Average

6.5x

5.5x

4.7x

 

13.1x

11.9x

9.0x

 

 

 

 

 

 

 

 

GKN PLC

6.4x

5.7x

5.0x

 

10.5x

9.9x

8.5x

Autoliv Inc.

5.5x

5.3x

4.8x

 

10.3x

10.5x

9.3x

Continental AG

6.3x

5.4x

4.9x

 

18.8x

10.0x

8.1x

ElringKlinger AG

7.3x

7.0x

6.1x

 

18.8x

16.5x

13.0x

Tower International Inc.

5.0x

3.6x

3.2x

 

--

20.1x

8.9x

Tenneco Inc.

6.6x

5.6x

4.6x

 

NM

13.7x

9.5x

Johnson Controls Inc.

11.6x

9.8x

7.7x

 

15.9x

15.2x

11.3x

TRW Automotive Holdings Corp.

3.6x

4.2x

3.8x

 

7.6x

7.4x

7.1x

BorgWarner Inc.

11.3x

8.8x

7.4x

 

20.9x

17.6x

13.6x

Valeo S.A.

3.3x

3.0x

2.7x

 

8.7x

8.0x

6.7x

Michelin

4.8x

4.3x

3.8x

 

9.2x

9.0x

7.8x

Federal-Mogul Corp.

8.8x

5.4x

4.7x

 

10.1x

10.4x

8.1x

Faurecia S.A.

4.7x

3.8x

3.3x

 

14.3x

9.1x

6.7x

Leoni AG

5.6x

4.7x

4.2x

 

11.9x

8.8x

7.4x

 

The downside looks pretty much baked into today's stock price.  With an EV of SFr515m, the stock is trading at 4.8x trailing EV/EBITDA on trough margins.  They earned SFr22m in EBIT in 2010 versus SFr85-110m in prior "normal" years.  DD&A run-rate is about SFr82m, so the company is today being valued as if 1-2% EBIT margins are the rule.  Even if Autoneum, for whatever reason, is only able to generate 3-4% margins it would still produce SFr145m in EBITDA and SFr7.10 in EPS, implying a fair value between SFr79-120/share.

 

I have no unique insight on the auto industry, but I suppose I can cite a couple stats that leave me somewhat encouraged.  1) New car inventory in the US is near the lowest it's ever been, and by a rather significant amount.  2) Further supply tightness from Japan should help pricing (good for companies whose production/sales weren't hurt, such as Autoneum).  3) US and European light vehicles sales are still 20-25% off pre-recession levels.  The main risk seems fairly obvious: deteriorating macroeconomic conditions affect consumer spending.  I wont argue with anyone if they have strong feelings for against this industry right now.

 

The leverage is quite manageable at 1.2x net debt-to-EBITDA, and the company's capex guidance is modest, a level that offsets DD&A. 

 

Plus you get a free kicker with the Swiss Franc exposure, if you're into that sort of thing.

Catalyst

Good earnings; gets acquired
    sort by    

    Description

    Autoneum Holding AG is one of the best post-spinoff opportunities I've seen in a couple years.  The company is caught perfectly in the crosshairs of all the classic post-spin confusion and unwitting selling.  It changed its name to something that nobody recognizes.  It's a European company while parts of Europe are melting down.  It was spun-off at the beginning of a market downturn that's hit small-cap stocks particularly hard.  It's a cyclical company against the backdrop of some discouraging macroeconomic data.  Its trailing financial results are well below historical norms.  It has a very small float of 3.1m shares.  It has only one sell-side analyst covering it.  This is textbook.

     

    Company Overview

     

    Autoneum was formerly a business segment of Rieter Holding AG (RIEN SW) until it was spun-off on 5/13.  The stock quickly traded to SFr119 but has barely managed an uptick since, losing 1/3rd of its value since the second day of trading.  Rieter is a Swiss industrial firm that's a well-run, albeit sleepy and uninteresting conglomerate.  They previously had two divisions: Textile Systems, and Automotive.  The textile business sells capital equipment used for spinning and producing yarn (I warned you it was boring).  There isn't much growth in the textile business but it has a surprisingly high ROIC and it generates nice cash flow.  The auto business was entered in the mid 80's and it's grown steadily since.  Management felt the auto business was ready to stand on its own although with spinoffs it's safe to assume that there are other motivations involved.

     

    Rieter's automotive business, now Autoneum, is a large player in acoustics and thermal management parts and systems.  What does that mean?  These are various types of covers and panels that are affixed to other parts inside the vehicle.  Behind the dashboard, for example, a car will need a protective layer of synthetic material that dampens engine noise and absorbs heat.  Same thing for the wheel wells, the underside of the hood, trunk, etc.  Autoneum has spent decades working on the materials and design of these parts in order to perform better, reduce weight, and improve cost.  They have 48 plants around the world while sales are 54% in Europe, 33% North America, 9% LatAm, and 4% Asia.  Here's the company presentation which can provide more details about what they sell and to whom, and here's another presentation that goes into some more detail about the spinoff.

     

    Financially speaking, Autoneum looks like most other auto part OEM's.  Its sales growth follows vehicle production growth while EBIT margins are in the mid-single digits and ROIC is in the low teens.  Nothing about Autoneum stands out from the crowd, it looks pretty much like what you'd expect, which is to say a typical auto parts OEM whose fortunes generally rise and fall with the industry.

     

    In early 2008 Rieter management undertook a broad restructuring of the company.  The moves included shutting down Western European manufacturing plants and moving them to Eastern Europe (cheaper labor, closer to customer plants), layoffs and plant closings in North America, a reduction in corporate overhead, a shift to more temporary workers, and disposal of some smaller non-core businesses.  The result has been lowering the EBIT breakeven point on revenue from about SFr2,000m to SFr1,625m.  The total expense cuts were SFr195m, but importantly only 2/3rd of it has been realized so far.  Management expects the remaining SFr65m to be recognized by the beginning of 2012 (restructuring in Western Europe is notoriously difficult, as most readers probably already know).  I believe these additional expense reductions will play a major role in allowing Autoneum to achieve EBIT margins above their previous average.

     

    Financials

     

    The company has 4.6m shares outstanding, SFr256m in debt and SFr123m in cash.  Historically, Autoneum had EBIT margins of 5.0% which was below the global auto OEM average of 6.2% and European average of 7.2%.  Margin ranges from company-to-company are surprisingly tight; there are only one or two outliers in either direction.  The value proposition is pretty simple.  If Autoneum returns to historical margins of 5%, which seems like a layup given the restructuring (almost every auto parts OEM has brought margins back to historical levels), it would produce EBIDTA of SFr175m and EPS of SFr12.00.  Comps trade at 6.5x trailing EV/EBITDA (5.4x current year) and 12.5 trailing P/E (11.5x current year).  This would imply that Autoneum is worth between SFr138-175/share for 65-110% upside.  I would call this a base case as it assumes average margins.

     

    Where things get interesting is when you factor in the remaining cost cuts of SFr65m, most of which should fall to the bottom line from here on out.  Holding revenue assumptions constant, I estimate EBIT margins would expand to something more like 7%.  While this is above Autoneum's historical average it's by no means a heroic assumption since that's close to every other European OEM margins.  This new margin structure would produce EBITDA of SFr218m and EPS of SFr18.00, implying a fair value of SFr205-225/share.  I forecast revenue growth based on the weighted average sell-side estimates for revenue growth of their customers.  Autoneum's sales are more volatile so while they did worse during the downturn (negative 20-30% sales vs customers negative 7-12%) they should do better during the rebound.  I've only budgeted for them to perform slightly better.

      2006 2007 2008 2009 2010 2011 2012 2013
    Revenue 2,179 2,363 1,960 1,387 1,678 1,737 1,910 2,025
    Growth 7.3% 8.4% -17.1% -29.2% 21.0% 3.5% 10.0% 6.0%
                     
    Expenses 2,084 2,271 2,211 1,503 1,656 1,674 1,775 1,863
                     
    EBIT 95 92 -251 -116 22 63 136 162
    Margin 4.3% 3.9% -12.8% -8.3% 1.3% 3.6% 7.1% 8.0%
                     
    DD&A NA NA NA 94 85 82 82 81
                     
    EBITDA NA NA 79 -22 107 145 218 243
    Margin     4.0% -1.6% 6.4% 8.3% 11.4% 12.0%
                     
    Net Income           34 82 101
    EPS           7.30 17.67 21.79

     

    EV/Sales is a good sanity check for companies like this.  Autoneum has the lowest multiple I can find and trades at a huge discount to the group average.  Same thing goes for book value.  I wouldn't use book value to determine what a company comprised of specialty assets is worth, but it's nevertheless a good indicator of whether you're in the right ballpark.  Same thing as before, Autoneum trades at a large discount to the group and is again the cheapest company by a considerable margin. 

     

    Price/Book

     

    EV/Sales

    Autoneum Holding AG

    126%

     

    Autoneum Holding AG

    0.31x

     

     

     

     

     

    Average

    241%

     

    Average

    0.74x

     

     

     

     

     

    GKN PLC

    247%

     

    GKN PLC

    0.74x

    Autoliv Inc.

    202%

     

    Autoliv Inc.

    0.85x

    Leoni AG

    223%

     

    Leoni AG

    0.48x

    Continental AG

    221%

     

    Continental AG

    0.84x

    Tenneco Inc.

    NA

     

    Tenneco Inc.

    0.54x

    Johnson Controls Inc.

    224%

     

    Johnson Controls Inc.

    0.78x

    TRW Automotive Holdings Corp.

    266%

     

    TRW Automotive Holdings Corp.

    0.49x

    BorgWarner Inc.

    331%

     

    BorgWarner Inc.

    1.46x

    Valeo S.A.

    188%

     

    Valeo S.A.

    0.36x

    Michelin

    137%

     

    Michelin

    0.67x

    Federal-Mogul Corp.

    147%

     

    Federal-Mogul Corp.

    0.62x

    Tower International Inc.

    298%

     

    Tower International Inc.

    0.40x

    Faurecia S.A.

    364%

     

    Faurecia S.A.

    0.29x

    ElringKlinger AG

    288%

     

    ElringKlinger AG

    1.89x

     

    No single competitor is a perfect comp for Autoneum, but ElringKlinger AG (ZIL2 GR) is probably the closest in terms of products and company size.  Somehow they manage ridiculously high margins (mid teens) so I wont single them out.  I confess to only being in the process of figuring out why they are so much more profitable and what additional hope that might spell for Autoneum.

     

     

    EV/EBITDA

     

    P/E

     

    TTM

    2011

    2012

     

    TTM

    2011

    2012

    Autoneum Holding AG

    4.8x

    3.5x

    2.3x

     

    NA

    10.9x

    4.4x

     

     

     

     

     

     

     

     

    Average

    6.5x

    5.5x

    4.7x

     

    13.1x

    11.9x

    9.0x

     

     

     

     

     

     

     

     

    GKN PLC

    6.4x

    5.7x

    5.0x

     

    10.5x

    9.9x

    8.5x

    Autoliv Inc.

    5.5x

    5.3x

    4.8x

     

    10.3x

    10.5x

    9.3x

    Continental AG

    6.3x

    5.4x

    4.9x

     

    18.8x

    10.0x

    8.1x

    ElringKlinger AG

    7.3x

    7.0x

    6.1x

     

    18.8x

    16.5x

    13.0x

    Tower International Inc.

    5.0x

    3.6x

    3.2x

     

    --

    20.1x

    8.9x

    Tenneco Inc.

    6.6x

    5.6x

    4.6x

     

    NM

    13.7x

    9.5x

    Johnson Controls Inc.

    11.6x

    9.8x

    7.7x

     

    15.9x

    15.2x

    11.3x

    TRW Automotive Holdings Corp.

    3.6x

    4.2x

    3.8x

     

    7.6x

    7.4x

    7.1x

    BorgWarner Inc.

    11.3x

    8.8x

    7.4x

     

    20.9x

    17.6x

    13.6x

    Valeo S.A.

    3.3x

    3.0x

    2.7x

     

    8.7x

    8.0x

    6.7x

    Michelin

    4.8x

    4.3x

    3.8x

     

    9.2x

    9.0x

    7.8x

    Federal-Mogul Corp.

    8.8x

    5.4x

    4.7x

     

    10.1x

    10.4x

    8.1x

    Faurecia S.A.

    4.7x

    3.8x

    3.3x

     

    14.3x

    9.1x

    6.7x

    Leoni AG

    5.6x

    4.7x

    4.2x

     

    11.9x

    8.8x

    7.4x

     

    The downside looks pretty much baked into today's stock price.  With an EV of SFr515m, the stock is trading at 4.8x trailing EV/EBITDA on trough margins.  They earned SFr22m in EBIT in 2010 versus SFr85-110m in prior "normal" years.  DD&A run-rate is about SFr82m, so the company is today being valued as if 1-2% EBIT margins are the rule.  Even if Autoneum, for whatever reason, is only able to generate 3-4% margins it would still produce SFr145m in EBITDA and SFr7.10 in EPS, implying a fair value between SFr79-120/share.

     

    I have no unique insight on the auto industry, but I suppose I can cite a couple stats that leave me somewhat encouraged.  1) New car inventory in the US is near the lowest it's ever been, and by a rather significant amount.  2) Further supply tightness from Japan should help pricing (good for companies whose production/sales weren't hurt, such as Autoneum).  3) US and European light vehicles sales are still 20-25% off pre-recession levels.  The main risk seems fairly obvious: deteriorating macroeconomic conditions affect consumer spending.  I wont argue with anyone if they have strong feelings for against this industry right now.

     

    The leverage is quite manageable at 1.2x net debt-to-EBITDA, and the company's capex guidance is modest, a level that offsets DD&A. 

     

    Plus you get a free kicker with the Swiss Franc exposure, if you're into that sort of thing.

    Catalyst

    Good earnings; gets acquired

    Messages


    SubjectSome questions..
    Entry06/21/2011 12:24 PM
    Memberjaff1035
    What is free cash flow yield (levered and unlevered) for the company today vs. what you expect it to be at 5% margins? how do those compare to peers? any pension issues? thanks.

    SubjectMargins
    Entry06/22/2011 06:25 AM
    Memberrosco37

    Could you explain your reasoning behind margin expansion beyond management's guidance?  We spoke to mgmt and they have reiterated their guidance to us and indicated that although there is a possibility of short term spikes in margins the medium and long term average really doesn't change (they couldn't explain the streets (GS) call of significantly higher margins).  The company's margin call was conditional on further cost cutting a "normalized" market environment. They went further to describe a process where the OEM will subsidize lower margins but cap them when times are good, leaving the companies with a reliable albeit tight margin range.  Thanks.


    SubjectRE: RE: CEO+Europe
    Entry07/14/2011 02:08 PM
    Membersancho
    Thanks for your response. I just realized they control several JVs that they consolidate in their P&L.. Book value of pre-spin Rieter is CHF71mm, though most of that seems to belong to the auto business. Sell-side shop Kepler asseses CHF160mm "market value" for AUTN minorities, based on annual CHF16mm earnings flowing to minorities times 10x. Whatever the adequate value of minorities is, shouldn't we add it to your EV calculation? I'd argue based on this your EV/EBITDA multiples for AUTN would be understated? Thanks again.

    SubjectRE: RE: RE: RE: CEO+Europe
    Entry08/02/2011 03:14 PM
    Memberzzz007
    utah,
     
    I own this one as well, so don't take this the wrong way, but I was thinking that you might want to revise the final sentence of your writeup from:
     
    "Plus you get a free kicker with the Swiss Franc exposure, if you're into that sort of thing."
     
    to:
     
    "Plus you get a free kick in the balls with the Swiss Franc exposure, if you're into that sort of thing."

    SubjectStill following?
    Entry12/22/2011 05:23 PM
    Memberele2996
    My understanding is that this is a Swiss holding company with manufacturing operation elsewhere. Is this so? If so, is the weakness in the stock related to currency conversions and not to manufacturing and sales problems?

    SubjectRE: RE: Still following?
    Entry12/23/2011 03:46 PM
    Memberele2996
    Thanks. Merry Christmas
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