VISTEON CORP VC
March 25, 2012 - 9:51am EST by
vandelay278
2012 2013
Price: 54.21 EPS $0.00 $0.00
Shares Out. (in M): 54 P/E 0.0x 0.0x
Market Cap (in $M): 2,906 P/FCF 0.0x 0.0x
Net Debt (in $M): -141 EBIT 0 0
TEV ($): 2,765 TEV/EBIT 0.0x 0.0x

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  • Auto Supplier
  • Sum Of The Parts (SOTP)
  • NOLs
  • Divestitures

Description

Visteon is a long.  The stock is undervalued relative to its sum-of-the-parts valuation.  The catalyst is the upcoming annual shareholder meeting where the composition of the board of directors will change dramatically to one that is much more shareholder-oriented.  Most shareholders want Visteon to monetize its assets faster than the company has been to date.  As such, once the annual meeting is over, it is our belief that Visteon begins to move expeditiously to monetize assets which should cause to the stock to realize its sum-of-the-parts valuation with a year’s time.

 

SUMMARY

Catalyst:          Change in the composition of the board of directors at the next annual meeting will lead to faster asset monetization.

Timing:            Proxy statement should be mailed out in late April.  Annual meeting is scheduled for June 14, 2012.  Assume about a year or so for asset sales.

Valuation:       $70 - $81, Average $75

Upside:            29% - 49%, Average 39%

Key Risks:       Weak auto demand, Asian and European recession, currency, raw material cost increases.

 

VALUATION

Sum-of-the-Parts Valuation ($ in mln except per shr amts)

Average

Low

High

Halla Climate Control Corp. (Visteon owns 70%)

$1,559

$1,445

$1,674

YFV, Duckyang and Other JVs (Visteon owns 50%)

$1,593

$1,531

$1,655

Other Visteon Ops (Interiors, Electronics & non-Halla Climate)

$810

$720

$900

Lighting Business (to be sold to Varroc for $92mln)

$92

$92

$92

Plus Consolidated Cash on Visteon B/S as of 12/31/11

$746

$746

$746

Less Halla Climate Control Cash as of 12/31/11

($301)

($301)

($301)

Plus Visteon’s Share of Cash at Yanfeng JV (see details below)

$325

$325

$325

Plus Proceeds from the Sale of the Grace Lake Facility

$78

$75

$80

Plus Estimated FY 2012 Free Cash Flow

$38

$25

$50

Plus Deferred Tax Assets / PV of NOLs

$146

$146

$146

Less Deferred Tax Liabilities as of 12/31/11

($154)

($154)

($154)

Less Consolidated Debt on Visteon B/S as of 12/31/11

($605)

($605)

($605)

Plus Halla Climate Control Debt as of 12/31/11

$78

$78

$78

Less Underfunded US Pension as of 12/31/11

($329)

($329)

($329)

Less Underfunded Foreign Pension as of 12/31/11

($118)

($118)

($118)

Plus Mkt. Val of VC Shares Contr. to Pension on 1/9/12

$79

$79

$79

Total Equity Value

$4,037

$3,755

4,318

Diluted Shares Outstanding

53.6

53.6

53.6

VC Equity Value per Share

$75.38

$70.11

$80.62

Percentage Upside from Current VC Market Price

39%

29%

49%

 

 THE STORY

 Visteon is a global supplier of climate (49% of sales), electronics (17% of sales), interiors (28% of sales), and lighting systems, modules and components (6% of sales) to global automotive OEMs.  Largely as a result of the global financial crises, Visteon filed for bankruptcy on May 28, 2009.  Visteon emerged from bankruptcy on October 1, 2010 a very different company with a very different shareholder base.  The new Visteon generates most of its earnings from its Asian operations and its shareholder base comprises many former debt holders who received their shares as a result of the bankruptcy.  Why does this matter?  Because Visteon’s Asian “operations” are basically made up of two separate companies, a 70% interest in Halla Climate Control (HCC), a Korean automotive climate products manufacturer, and a 50% share of Yanfeng Visteon Automotive Trim Systems Co. Ltd. (YFV), which is a JV with Shanghai Automotive Industry Corporation’s (SAIC) automotive components group Huayu Automotive Systems (HASCO).  YFV is primarily an automotive interiors and seating manufacturer but also makes automotive electronics, safety, and exterior parts.  Combined, HCC and the equity earnings from YFV represent about 70-75% of Visteon’s adjusted EBITDA and thus these two assets make up the vast majority of Visteon’s valuation.  Since both HCC and YFV are basically separate and distinct entities, Visteon’s share of them could be sold relatively easily.  At the moment, Visteon is in the process of merging its interiors business with YFV and has an agreement to sell its lighting business.  As such, if Visteon were to sell its stakes in HCC and YFV, it would be left with its non-HCC climate business, its electronics business, and its stakes in a few other JVs.  At that point, Visteon would be such a small sub-scale climate systems supplier that the only logical conclusion would be for it to sell its non-HCC climate business as well which would leave Visteon as a publicly-traded auto parts supplier with only an electronic business generating $1.4bln in annual sales, stakes in JVs generating around $50mln in annual equity earnings and probably a ton of cash on its balance sheet.  At this point, the company could either continue to sell assets individually or sell the entire company.  While we believe that YFV would also be a buyer for the electronics business, the best outcome for shareholders would likely be a sale of the entire remaining company at a price that would factor in the value of the remaining businesses as well as $3.0bln in NOLs that may be much more usable to a potential acquirer.  We believe that the asset monetization path outlined above becomes much more likely as a result of the current upheaval of the board of directors.  Shareholders have made it known to management and the current board that they want the company to move quickly down this path.  Now that the company is on the verge of seating a near-unanimously shareholder friendly board, we think the time is ripe to own Visteon.

 

CHANGE IN BOARD OF DIRECTORS

 Based on our research, it is our belief that Visteon’s ten-member board is composed of four shareholder-friendly directors and six non-shareholder-friendly directors.  As a result, the board has been on the side of the CEO Don Stebbins who has been a proponent of Visteon’s slow pace of asset monetization which is contrary to the desires of the shareholder base.  Well, things are about to change.  On March 16, 2012, Visteon issued a press release that contained two very important items.  First, the company announced that “some current members” of the board of directors may not seek to be re-elected, and second, that the board had created a special committee to identify candidates for any such vacancies.  It is clear from this press release that the collective voice of shareholders is finally being heard by the board.  We believe that as few as three and as many as five directors may not stand for re-election and that the special committee, which we believe is composed of the four current shareholder-friendly directors, will select directors hand picked by shareholders to replace them.  As such, we believe that after the June 14, 2012 annual meeting, the composition of the Visteon board will be between seven to nine shareholder-friendly directors and one to three non-shareholder-friendly directors.  Once the new board is seated, it is also our belief that the company will move expeditiously to monetize assets.

 

VALUATION DETAIL

Halla Climate Control

HCC trades in South Korean won under the Bloomberg ticker 018880 KS so its valuation is readily attainable.  We are valuing HCC at its current market price and at a 20% premium to market which puts the value of the 70% of it that is owned by Visteon at between $1.45bln and $1.73bln.  We are assuming a tax basis of around $1.45bln based on HCC’s market price when Visteon emerged from bankruptcy and thus a $289mln taxable gain at the top end of our valuation range.  We are assuming that Visteon is able to shield $120mln of that taxable gain based on its annual NOL usage limitation of $120mln which is a result of the ownership change that occurred upon the company’s exit from bankruptcy.  As such, we arrive at a net after-tax valuation for Visteon’s 70% stake in HCC of $1.45bln to $1.67bln.  While the logic behind selling HCC is clear, another alternative is for Visteon to buy the 30% of HCC that it doesn’t already own.  Such a transaction would make sense assuming it is earnings accretive (which it probably would be) and that it would provide Visteon with a quicker way to use its NOLs by using tax-efficient transfer pricing to create greater positive pre-tax income in the countries where Visteon has NOLs.  While both options sound great to us, we think that Visteon will have a difficult time convincing Hyundai Motor, which both relies on HCC for 75% of its automotive climate system needs and provides Visteon with 31% of its revenues, to allow it to own 100% of HCC.  In addition, due to the complicated historical and familial relationships between Hyundai and Halla Group, which we discuss below, we find it difficult to believe that any non-Korean entity will be allowed to own 100% of HCC.

HCC was started in the 1986 as a JV between Ford and Mando Machinery Co (since renamed Mando Corp) which was, and is again, owned by Halla Group, a South Korean chaebol that was founded by the younger brother of the founder of the Hyundai chaebol.  In 1999, due to the Asian financial crisis, Halla Group found itself in dire need of capital and was forced to selloff assets including Mando Corp and Halla Climate.  In 2006, Mando Corp, which at the time was owned by private equity via a firm called Sun Sage, was being shopped.  According to Korean press reports, in 2006 right before his death, the founder of Halla Group, Chung In-yung, told his son Chung Mong-won, the chairman of Halla Group that he must buy back Mando Corp.  At the time there were many interested parties including KKR and Hyundai Motor, which accounted for nearly 70% of Mando’s sales.  Suffice it to say that neither KKR nor any other foreign bidder stood a chance in buying Mando simply because Hyundai Motor, which was (and is currently) run by Chung Mong-koo (Halla Group’s chairman Chung Mong-won’s cousin) wouldn’t allow it.  In the end, Hyundai, wanting to literally keep the asset in the family, decided to let Halla Group buy back Mando which it did in 2008.  We believe, and numerous press reports suggest, that not only would Hyundai not approve of Visteon, or any other foreign entity, owning 100% of HCC, it would be interested in either buying Visteon’s stake itself or having Halla Group buy it.  As such, we believe that the simplest way to monetize Visteon’s stake in HCC is to sell it to either Halla Group or Hyundai Motor.

 

YFV, Duckyang, and Other JVs

We are valuing YFV and the Other JVs at between 10x and 11x earnings which we feel is conservative given the earnings growth that these businesses have produced over the last few years.  We are assuming that YFV and the Other JVs combined generate around $190mln in equity earnings in 2012 which gets us to a gross valuation of $1.9bln to $2.1bln.  To that we are adding $25mln which is Visteon’s 50% share of Duckyang’s market cap.  We are assuming a tax basis of $644mln (which is what the all of Visteon’s JVs are carried at on its books) on the JVs which results in taxable gains of $1.3bln to $1.5bln.  We are again shielding $120mln of the taxable gains with Visteon’s annual NOL usage limitation (we assume that one deal happens in FY12 and the other happens in FY13) which results in taxes of $400mln to $466mln which in turn results in an after-tax valuation of $1.53bln to $1.65bln.  While we suspect that the tax basis of the Visteon JV’s is higher, we decided to use the book basis because it felt conservative.  Note that Visteon is currently in the process of merging its interiors business with that of the YFV JV.  This is being done to: 1) provide YFV with a global business (as opposed to a purely Asian business), 2) to simplify the structure of the JV and its relationship with Visteon so that Visteon’s stake could be more easily sold in the future, and 3) to de-consolidate a low pre-tax profit business which makes the remaining businesses more profitable on a pre-tax basis which will allow Visteon to make use of its NOLs more quickly.  The equity earnings numbers above do not include any earnings from the core Visteon Interiors business.

 

Visteon’s Other Businesses

These businesses include Visteon’s core interiors business, electronics business and non-Halla Climate business.  We estimate the total EBITDA for these three businesses is approximately $180mln.  We arrived at this number by taking the midpoint of Visteon’s 2012 Adjusted EBITDA guidance of $670mln, subtracting $190mln of equity earnings for the Visteon JVs, adding $80mln for HCC’s minority interest, subtracting $360mln of HCC EBITDA after Visteon corporate allocations, subtracting $15mln of Visteon Lighting business EBITDA, and subtracting $5mln of incremental rent expense as a result of the sale-leaseback of the Grace Lake Corporate Facility.  Using EBITDA multiples of 4x - 5x, we arrive at a valuation range of $720mln – $900mln.  We are assuming no taxable gain here for a couple of reasons.  First, Visteon’s write down of the carrying value of its lighting business by $66mln from $158mln to $92mln just before it announced the sale implies that Visteon is likely to be carrying the rest of its assets at values at least as high as market.  Second, Visteon had nearly $5bln of total assets as of 12/31/11.  If one nets out total HCC assets of $1.8bln, $644mln assigned to the JVs, $445mln in cash (excluding HCC cash of $301mln), and $353mln of intangible assets, that still leaves $1.75bln of assets on the balance sheet.  Since Visteon emerged from bankruptcy only a year and a half ago, we believe that its current balance sheet provides a decent proxy for the tax basis in its assets.  As far as valuation multiples go, we felt that 4x-5x was appropriate give that Visteon’s lighting business, which is very sub-scale and low-profitability was just sold for 5-6x EBITDA.

 

Visteon Lighting Business

On March 9, 2012, Visteon agreed to sell this business to Varroc for $92mln.  As we mentioned above, since Visteon just wrote down the carrying value of this asset to the sales price, we are assuming no taxable gain here.

 

Other Line Items in the Sum-of-the-Parts Valuation

  • Cash.  Visteon had total consolidated cash of $746mln as of 12/31/11.
  • Less HCC Cash.  HCC is fully consolidated in Visteon’s financials.  Given that we are valuing HCC separately we must subtract, or de-consolidate, the portion of Visteon’s consolidated cash balance that is from the consolidation of HCC’s $301mln cash balance.
  • Cash at the YFV.  We have been told from multiple sources that the net cash balance at YFV is in the $750mln to $1.0bln range.  Since Visteon owns 50% of YFV, half of the value of the cash should accrue to Visteon in addition to the value of the JV itself which is being valued on earnings which is likely have a minimal interest income component.  As of 12/31/11, YFV had $1.3bln of current assets versus only $15mln of non-current liabilities.  Based on these two balance sheet items alone, one could justify saying that there is $750mln to $1.0bln of net cash at YFV.  However, YFV also had $1.0bln of current liabilities as of 12/31/11 which means that YFV has positive working capital of $300mln which could be considered decent proxy for its cash balance.  Given that we have not been able to verify the net cash balance using audited financials, we have decided to take the midpoint between a justifiable low potential YFV net cash balance of $300mln and the high number that we’ve heard from multiple sources of $1.0bln which puts us at $650mln in estimated net cash at YFV.   Since Visteon owns 50% of YFV, we have allocated 50% of our estimated $650mln in YFV net cash, or $325mln, to Visteon’s valuation.
  • Cash from the Sale of the Grace Lake Facility.  When asked about the expected sale price of this asset on Visteon’s most recent earnings call, Don Stebbins replied by saying the book value is in the $75mln – $80mln range implying that the sale price will be in the same range.  We are assuming that this property is sold in a sale-leaseback transaction which results in an incremental $5mln in rent expense going forward.  Given that we are assuming the property is sold for book value, we are assuming no taxable gain is generated.
  • Estimated 2012 FCF.  The company is guiding to $25mln - $50mln in free cash flow in 2012.
  • Deferred Tax Assets (DTAs) / PV of NOLs. Visteon lists $1.67bln of DTAs as of 12/31/11: $134mln for “Employee benefit plans”, $111mln for “Capitalized expenditures for tax reporting”, $1.174bln for “NOLs and carryforwards”, and $253mln for “All other”.  The company has taken a near full valuation allowance of $1.66bln against these DTAs as of 12/31/11.  Regarding the valuation allowance applied to “Employee benefit plans”, we discuss that below.  Regarding the valuation allowance allocated to “Capitalized expenditures for tax reporting” and “All other”, we have no opinion.  Regarding the valuation allowance applied to the NOL DTAs we feel that the company is being overly conservative.  Visteon has over $3bln of NOLs on its books as of 12/31/11.  If you assume that they will be able to shield $35mln of annual pre-tax income starting in 2014 with the tax shield growing by 5% per year for the next 20 years, then the present value, assuming a 7.5% discount rate, of the tax savings at 35% is approximately $146mln.  We think that this is a conservative valuation of the NOL as it only factors is a slow recovery in Visteon’s pre-tax income and it doesn’t factor in the value that the NOLs could have to an acquirer.
  • Deferred Tax Liabilities (DTLs).  As of 12/31/11, Visteon had $154mln of deferred tax liabilities.  While we don’t know the exact breakdown of these DTLs, we are conservatively reducing our equity valuation by the full amount as we believe that a large percentage of these DTLs may relate to future taxes due on cash to be repatriated from foreign affiliates.
  • Debt.  Visteon had total consolidated debt of $605mln as of 12/31/11.
  • Plus HCC Debt.  In much the same way that we subtracted, or de-consolidated, HCC’s cash from Visteon’s consolidated cash balance we must reduce Visteon’s consolidated debt balance by adding back, or de-consolidating, HCC’s debt which was $78mln as of 12/31/11.
  • Underfunded US and Foreign Pensions.  Visteon had a $329mln underfunded US pension and a $118mln underfunded foreign pension as of 12/31/11.  While we believe that Visteon will probably be able to deduct some portion of future pension contributions against pre-tax income, we are conservatively assuming no tax deduction benefit on future pension contributions and thus the entire underfunded amount of the pension reduces our overall equity valuation. This happens to be in line with what Visteon’s accountants are assuming as they have taken a full valuation allowance against the $134mln in deferred tax assets associated with employee benefit plans.
  • Market Value of VC Shares Contributed to Pension.  On 1/9/12, Visteon contributed 1.45mln shares to its pension.  We are valuing these shares at Visteon’s current market price which puts the overall valuation at approximately $79mln.

Catalyst

 
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