Rassini SAB de CV RASSICPO:MM
April 15, 2015 - 8:40pm EST by
flubber926
2015 2016
Price: 62.00 EPS 6 7.1
Shares Out. (in M): 157 P/E 10 9.1
Market Cap (in $M): 9,750 P/FCF 8.8 8.4
Net Debt (in $M): 1,220 EBIT 1,349 1,549
TEV ($): 10,970 TEV/EBIT 8.1 7.1

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  • Auto Supplier
  • vertically integrated
  • Brand
  • Competitive Advantage
  • Mexico

Description

RASSINI Investment Thesis

 

SNAPSHOT

 

The following is an investment idea of a relatively small Mexican company (US$ 650 mn) market capitalization, which holds a leading position in the automotive sector in NAFTA and Brazil.

Company was under covered (one analyst) and went through a transformational process. During the last 15 months stock price has risen 528% for RASSINIA and 531% for RASSINICPO. This incredible price hike might send investors the message that the company is fully priced or that market got over hyped on RASSINI, yet we have good reason to believe that RASSINI is a great company and that we are still at a good entry point and that this is one of the cheapest ways to participate in the booming NAFTA automotive sector

 

OVERVIEW

RASSINI is a Mexican company and leading designer and manufacturer of suspension and brake components for the global automotive industry. RASSINI has developed for itself a solid name and a respected brand as it has been in the autopart business for 85 years, being a key supplier for most OEMs. The Company has 10 production facilities distributed in Mexico, the U.S. and Brazil

RASSINI produces suspensions (leaf springs and coil springs) and brakes for light and heavy vehicles. It is the world’s largest producer of suspension components for light trucks as 8 out of the 10 highest selling light trucks in the Americas (according to Wards Auto) use RASSINI leaf springs.

 

 

PRODUCT DESCRIPTION

 

Leaf Spring: Iron device with an arched form, which is located in the frame of the vehicle near the wheel, used in heavy trucks (pick up vans, trailers and comercial trucks). Leaf Springs are components used for weight cushion, Rassini is the world largest designer and producer of leaf springs for light vehicles, with a market share in North America of 97% and in Brazil of 65%.

 

Coil Spring: Iron device with a spring form, which is located in the frame of the vehicle near the wheel, used in light vehicles (cars). Coil Springs are components used for weight cushion, Rassini has a market share in North America of 55% and in Brazil of 14%.

 

Brakes: The production of brakes consists of three products. Rotor & Drums and machined hubs. The rotor and drums are the circular components which provide a cylindrical surface to transmit the braking force. The machined hub provides the connection between the wheel and the rotors and drums. Market share of this division stands at 15%

 

 

Business Segment

Revenues 2014

Revenues 2013

Var %

NAFTA

9,505

7,344

29.4%

SUSPENSIONS

6,147

5,175

19.3%

Leaf Springs

4,969

4,166

16.7%

Coil Springs

1,178

1,009

18.8%

BRAKES

3,358

2,169

54.8%

BRAZIL

2,395

3,018

(20.6%)

Leaf Springs

2,065

2,632

(21.5%)

Coil Springs

330

386

(14.8%)

TOTAL

5,183

1,027

14.8%

 

 

 

 

 

Business Segment

EBITDA 2014

EBITDA 2013

Var %

NAFTA

1,376

1,010

36.2%

BRAZIL

191

320

(40.3%)

TOTAL

1,568

1,343

16.8%

 

 

 

INVESTMENT CONSIDERATIONS

 

We believe RASSINI is a great investment opportunity for the following reasons:

 

1.     VERTICALLY INTEGRATED

2.     LASTING RELATIONS WITH OEMS

3.     RESPECTED BRAND

4.     EXPOSURE TO HIGH GROWING MARKETS

5.     POSITIVE MARKET DYNAMICS IN THE U.S.

6.     STRONG BALANCE SHEET

7.     TECHNOLOGICAL INNOVATION

8.     HIGH OPERATING LEVERAGE

9.     NEW INCOMING CONTRACTS

 

 

VERTICALLY INTEGRATED

RASSINI is a vertically integrated Company. In its suspension business the raw material is steel bar, which the Company acquires according to certain specifications, RASSINI controls all the production process. In the brake division the Company is involved in all the process from the scrap melting to the machinery. We see this as an advantage as the Company is in charge of maintaining an even quality in all of its products and remains able to capture higher margins. The risk of fluctuations in the price of steel and scrap is non-existent as all of the Company’s contract are established on a “pass-through” basis, this means that RASSINI transfers any increases or decreases in steel and scrap prices to its customers, usually the transfer takes from one to three months to absorb and it allows the Company to maintain its margins.

 

 

LASTING RELATIONS WITH  OEMS

 

RASSINI’s clients are mostly  OEMs located in North America and Brazil. Providing autoparts for OEMs and Aftermarket is extremely different even though the product sold is exactly the same. It is true that participating in the Aftermarket reduces the company’s exposure to the natural cyclicity of the car sector as autoparts sales are less dependent on the succes of a certain platform or on economic activity. On the other hand being a supplier for OEMs increases the exposure to inherent fluctuations of any sector with high cyclicity, but it also allows RASSINI to sell it products at a higher price hence a higher margin.

The thing that happens is that OEMs tend to pay for the certainty that their supplier will provide in timely fashion and the products sold wil have zero deffects and can be modified in any necessary case. The development part is as well complicated as the car companies work with the autoparts company in the development of the product, usually this product design and development takes some time and recquires the supplier to have an R&D department (another expense for the Company).

In order to becomer more cost-efficient OEMs look to maximize the value of their platforms by using one platform for several vehicles hence reducing production costs. Taking into consideration this integration trend; contracts now tend to have longer duration.

For all this reasons we see RASSINI’s exposure to OEMs as a positive factor as there are several entry barriers, such as lower competition,  as well as a more predictable cash flow generation

One of the Company’s possible risk is the high dependence it has on the Detroit 3, as they represent 71% of Consolidated Sales, we believe that taking into consideration the robust brand portfolio of these OEMs this risk is partially offset. Looking into market dynamics in NAFTA area RASSINI’s high dependence on American automotive industry can be seen as a strength for the time being.

 

Sales Distribution by Customer

CUSTOMER

% OF CONSOLIDATED REVENUES

U.S. OEMs

71%

European OEMs

9%

Asian OEMs

7%

Other

6%

Aftermarket

4%

Trailers Brazil

3%

 

 

 

 

 

BRAND AWARENESS

 

RASSINI has been able to mainttain this fruitful relation with OEMs thanks to the quaity of its products, RASSINI has won several awards granted by OEMs such as  “Supplier of the Year Award” given by GM to RASSINI’s brake division for second consecutive year; the “100 Best Managed Companies for Zero Defects” granted by Ford to the brake division as well; “Certificate of Achievement” by Fiat-Chrysler acknowledging NAFTA Brake division and  “Best Performance Supplier Award” given by Toyota to the Brazilian suspensions operation. AS it was mentioned RASSINI holds a leading position regarding market share in the market it operates and in the segment it operates. In Rassini is the world largest designer and producer of leaf springs for light vehicles, with a market share in North America of 97% and in Brazil of 65%. Rassini has a market share in coil springs in North America of 55% and in Brazil of 14%. Market share stands for brake division at 15%. 8 out of the 10 highest selling light trucks in the Americas (according to Wards Auto) use RASSINI leaf springs.

 

Top Selling Light Trucks in the U.S. 2013

 

MODEL

Units Sold

Rassini Leaf Springs

Ford Serie F

713,960

X

GM Silverado

480,414

X

Chrysler Ram Pick-Up

344,772

X

Honda CR-V

303,904

 

Ford Escape

295,993

X

GM Equinox

238,192

X

Toyota Rav 4

218,249

 

Ford Explorer

192,397

X

GM Sierra

184,339

X

Chrysler Cherokee

174,275

x

 

 

 

EXPOSURE TO HIGH GROWING MARKETS

 

RASSINI has operations in Mexico, the U.S. and Brazil. According to OICA these three countries encompassed roughly over 20% of car production in 2013. We like RASSINI’s exposure to NAFTA as 80% of its revenues come from these region. As we all know car production is reaching historical highs as a result of pent-up demand and a good economic scenario in the U.S. There are many fears that this virtous cycle in the automotive sector cannot be sustained over the long run. While we must admit that economic turmoil in China and Europe is worrisome, yet we have reasons to believe that auto production will maintain its growth, it is true that growth will come at a less dynamic pace but according to IHS production in 2014 (17 million) will reach 18.9 million in 2019, this would imply anual growth rates of 2.2%. IMF expects Mexico and the U.S. to grow at higher rates than 2.2%.

 

 

2014 PRODUCTION STATISTICS BY COUNTRY

Country

Total Vehicles Produced (millions)

% of Total

China

23.7

26.4%

USA

11.7

12.9%

Japan

9.8

10.9%

Germany

5.9

6.6%

South Korea

4.5

5.0%

India

3.8

4.2%

Mexico

3.4

3.8%

Brazil

3.1

3.5%

Spain

2.4

2.7%

Canada

2.4

2.7%

Others

19.1

21.3%

TOTAL

89.7

100%

 

 

 

NAFTA VEHICLE PRODUCTION GROWTH VS. MEXICO AND THE U.S. GDP GROWTH

Year

Nafta Vehicle Market Growth

U.S. Economic Growth

Mexican Economic Growth

2007

(1.3%)

1.8%

3.1%

2008

(16.6%)

(2.9%)

1.4%

2009

(31.7%)

(2.8%)

(4.7%)

2010

38.4%

2.5%

5.1%

2011

10.1%

1.8%

4.0%

2012

16.8%

2.8%

3.9%

2013

5.9%

1.9%

1.1%

2014

4.9%

2.8%

3.0%

2015E

2.4%

3.0%

3.5%

2016E

2.9%

3.0%

3.8%

2017E

2.2%

2.9%

3.8%

2018E

1.6%

2.6%

3.8%

2019E

1.6%

2.2%

3.8%

 

 

Mexico has recently attracted a lot of investment in the car industry. There are several reasons behind this phenomenon. First of all the exposure to the NAFTA market which is one of the biggest in the world in terms of consumption and labor is highly specialized while maintaing efficient costs (it is 9% lower than China and 16% lower than the U.S.). This has not gone unnoticed as several OEMs have begun to establish plants in Mexico such as Nissan, Renault, Daimler, KIA, BMW, Volkswagen, Ford among others.

Car production in Mexico has grown at a steady pace and has become of the utmost importance for the country, so we believe the environment should help companies like RASSINI. For instance car production in Mexico grew from 2.3 million in 2010 to 3.2 million in 2014, a 9.2% anual growth rate.

One of the main concerns is RASSINI’s exposure to the Brazilian market. While it is no secret that Brazilian economic performance has been lackluster to say the least and its car industry has been heavily affected as vehicle production dropped 15% in 2014. It is worth mentioning that even in a really complex situation, Brazilian operations were profitable and had an 8% margin. We believe that even with a complex scenario Brazilian market is really attractive due to its demographics and demand.

 

 

MARKET DYNAMICS

 

Vehicle fleet in the U.S. is reaching all time highs in terms of age. On average it has reached 11.3 years, an all time high. We believe this phenomenom will contribute to drive demand un its upward trend. An we have seen better figures on employment and wages that lead us to believe that a raise in interest rates might not hurt demand severely.

 

 

AVERAGE AGE OF VEHICLE FLEET IN THE U.S.

Year

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Average Age of Vehicle Fleet

9.6

9.7

9.8

9.8

9.9

10

10.1

10.3

10.6

10.9

11.2

11.4

 

 

ALUMINUM NOT A MENACE FOR RASSINI

 

The automotive sector has been under scrutiny for quite some time due to environmental issues. Car manufacturers have assumed commitments to reduce the carbon footprint of its products. All efforts have been channeled at lighter cars that consume less gasoline. In order to achieve that, there has been some shifting from steel to aluminum in certain auto parts. The shift has already been made in engine parts, in some extent in transmissions. We have seen that the next move is in car structural parts specifically in the bodywork. For this reason auto part manufacturers specialized in aluminum do not pose a threat to Rassini. In any case RASSINI is the main developer of technology in springs and one of the most important in brakes, so we believe the Company will develop technological change or will be one of the first movers in case a technological change is made. This has already been achieved through RASSINI’s “nodular iron brakes”, which are significantly lighter. This product is being used in the 2014 Corvette Stingray and the Maseratti Quatroporte.

 

SUCCESSFUL DELEVERAGE

 

During the 2008-2009 economic crisis, RASSINI had a complex situation as it was buried with debt, in 2009 Net Debt to EBITDA ratio stood at 5.7x. We believe RASSINI learned its lesson as there have been substantial efforts towards reducing debt in the Company, this efforts have beared its fruits as in 2014 RASSINI leverage ratio was 1.3x. Company has a comfortable debt calendar for the coming years and with growing cash flow generation we believe liquidity is far from being an issue.

 

OPERATING LEVERAGE

 

One of the main competitive advantages RASSINI has is its operational flexibility. Being participant in a highly cyclical industry having a low break-event point is fundamental as it allows the Company to navigate calmly during low cycles. RASSINI has low break-even points, which allows the Company to have higher margins than the competition while remaining competitive in prices. There are several factors that have made this posible such as careful strategic planning and efficient operation among others.

 

 

NEW CONTRACTS

 

Recently RASSINI was awarded new contracts that will translate into MXN$ 6.6 billion of additional revenues. This contracts have been awarded to the brake division, which will allow the Company to practically double its brake divsion’s market share to reach 28%. One of these contracts is for producing the brakes for the new Audi Q5, which will be assembled in Mexico

 

PEERS

 

RASSINI trades at similar valuation than comparable companies, yet it has considerable higher margins than the sample.

COMPANY

COUNTRY

MARKET CAP (local FX)

ENTERPRISE VALUE

(local FX)

EBITDA MARGIN 14

EV/EBITDA

EV/EBITDA 15E

P/E

P/E 15E

American Axle

U.S.

$1,943

$3,231

12.7%

6.9x

5.4x

11.8x

9.5x

Borg Warner

U.S.

$13,734

$14351

16.7%

10.4x

9.4x

18.7x

17.5x

Dana Holdings

U.S.

$3,481

$3,970

10.7%

5.6x

5.4x

8.7x

10.1x

Meritor Inc.

U.S.

$1,225

$2,005

7.8%

6.7x

6.3x

10.0x

9.2x

Tower

U.S.

$559

$963

9.1%

5.1x

4.2x

11.3x

8.6x

TRW

U.S.

$12,058

$12,801

6.0%

12.2x

6.4x

14.0x

13.3x

MEDIAN

 

 

 

9.9%

6.8x

5.9x

11.6x

9.8x

RASSINI

Mexico

$9,974

$12,013

13.2%

6.7x

5.2x

12.8x

10.3x

 

 FINANCIALS

 

Rassini had revenues for MXN$11.9 billion in 2014. We are forecasting  Revenues will reach MXN$ 16.8 billion in 2017. First hand, our approach might seem aggressive and that we are over hyped on NAFTA automotive industry, yet we deem our numbers reasonable.

As we mentioned before RASSINI has already signed contracts that ensure additional revenue of MXN$6.6 billion, we are reflecting this additional sales in the course of 4 years distributing them evenly, this contracts all come from the brake division, so the impact of this additional revenues is MXN$1520 million a year, or a 45% growth for this division in 2015.  For suspensions we are taking a conservative stance as Revenues for this division will grow 5% in 2015 and afterwards will grow at 3% rates yearly.

For Brazilian operations we are taking a bearish stance. We are decreasing Revenues 10% and 8% for 2015 and 2016 respectively as we do not see any short-term catalyst that might help auto demand.

EBITDA Margins remain steady with marginal increase of 100bps and 300 bps for 2015 and 2016 respectively.

It is worth mentioning that US$ 10 million were impacted in 2015E FCF on the back of lower energy costs and a positive impact from the peso deppreciation.

 

 

2011

2012

2013

2014

2015E

2016E

2017E

REVENUES

9,353

9,392

10,362

11,900

13,486

15,025

16,782

% increase

 

0.4%

10.3%

14.8%

13.3%

11.4%

11.7%

EBIT

842

841

943

1,123

1,349

1,549

1,730

% increase

 

(0.1%)

12.2%

19.0%

20.2%

14.8%

11.7%

D&A

293

322

319

446

447

498

556

% of sales

 

3.4%

3.1%

3.7%

3.3%

3.3%

3.3%

EBITDA

1,178

1,203

1,343

1,568

1,796

2,047

2,286

% increase

 

2.1%

11.6%

16.8%

14.5%

14.0%

11.7%

EBITDA Margin

12.6%

12.8%

13.0%

13.2%

13.3%

13.6%

13.6%

 

 

 

 

 

 

 

 

Net Financial

535

(396)

(342)

(229)

(150)

(100)

(10)

Taxes

(330)

(217)

(676)

(240)

(405)

(465)

(519)

Minorities & PE

(97)

(43)

(65)

(12)

(12)

(12)

(12)

CAPEX

(187)

(188)

(207)

(238)

(270)

(301)

(336)

 

 

 

 

 

 

 

 

FCF (normalized)

1,099

359

52

850

1,109

1,170

1,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FCF VALUATION

Due to the cyclical nature of RASSINI’s business we use 12.0x multiple on FCF.

 

 

2011

2012

2013

2014

2015E

2016E

2017E

FCF (normalized)

1,099

359

52

850

1,109

1,170

1,409

Multiple

12.0x

 

 

 

 

 

 

Value

13,187

4,310

628

10,196

13,312

14,034

16,913

 

 

 

 

 

 

 

 

Non Core

272

13

12

32

32

32

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 -

 -

 -

 -

 -

441

2,088

 

 

 

 

 

 

 

 

TOTAL EQUITY VALUE

12,841

3,645

(425)

9,162

12,209

13,292

17,725

Equity A

7,161

2,033

(237)

5,110

6,809

7,413

9,885

Equity CPO

5,679

1,612

(188)

4,053

5,400

5,879

7,840

Target price per share A

40

11

(1)

29

38

42

55

Target price per share CPO

80

23

(3)

57

76

83

110

 

 

 

 

 

 

 

 

Upside

1,240%

148%

(130%)

14%

22%

33%

78%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DCF VALUATION

 

2014

2015

2016

2017

2018

2019

 

EBITDA

1,568

1,796

2,047

2,286

2,401

2,521

 

Taxes

(240)

(405)

(465)

(519)

(545)

(572)

 

Change in WC

(104)

(19)

(23)

(13)

(11)

(10)

 

CAPEX

(550)

(300)

(320)

(357)

(375)

(394)

 

 

 

 

 

 

 

 

 

FCF

883

1,110

1,285

1,423

1,491

1,564

18,404

 

 

 

 

 

 

 

 

 

WACC

10.5%

Perpetual Growth

18,404

 

 

Present Value

15,172

-        Net Debt

1,883

-        Minorities

274

Equity Value

13,014

 

 

Target price per share A

41

Target price per share CPO

81

Upside

30%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
 
 
 
 

Catalyst

1Q earnings which should alert street of impending valuation, new contracts, Mexican peso depreciation vs US Dollar

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