Visteon (VC) was last written up on VIC by jwilliam903 in August, and since then the company has announced the sale of its publicly listed Korean subsidiary Halla Visteon Climate Control (HVCC). This is my brief update on the current value proposition for VC post-transaction and why it is one of the cheapest unlevered EV/EB/ITDA opportunities in the market right now.
Visteon is an automotive system/module/component supplier to major automakers globally; it generated a bulk of earnings from its Korea-listed climate control subsidiary HVCC with the remainder of the business being auto electronics, including cockpit displays, driver information, and other electronics. Its growth strategy going forward is to focus on the “connected car” as automobiles pursue greater connectivity to the internet, infotainment, and on-road support. After the sale of HVCC, Visteon will become a pure-play auto electronics supplier with the #3 position globally behind Conti and Denso.
VC owned a 70% stake in HVCC which it will be selling to Hahn & Co. and Hankook Tire at an attractive $3.6B valuation; it has hedged all FX exposure to the deal. Below is VC’s estimate for after-tax proceeds net to Visteon at around $3.1B, with a potential additional $100MM in tax savings not factored in.
VC valuation post-transaction
VC’s current EV is $5.5B, of which $785MM is attributable to minority interest of HVCC; adjusting for the HVCC transaction which will also add $3.1B of cash at mid-point, the new VC will have EV of $1.6B.
Management is guiding to 2015 EBITDA of $240MM which I believe errs on the conservative side given low oil prices, healthy auto sale trends, and generally better guidance discipline after the 2008-2009 near-death experience. This guidance seems to exclude the $40-$70MM in synergies they have identified and expect to deliver by year-end 2016 via the Johnson Controls (JCI) integration.
“On track to deliver $40-70 million in annual Electronics synergies by end of 2016.” –DB Global Auto Industry Conference, January 2015
So at the end of the day, you are looking at a #3 pure-play in global vehicle electronics, an industry with favorable tailwinds, valued at close to 5x unlevered EV/EBITDA ($1.6B + $100MM potential additional tax savings divided by $300MM run-rate EBITDA). The key uncertainty for me going forward is how management delivers the cash proceeds from HVCC to shareholders in a tax-efficient manner.
The usual cyclical risks with the auto industry apply with potentially higher oil prices on geopolitical unrest, a slowdown in the global economy, etc. The biggest execution risk is how capital via the HVCC windfall is returned to shareholders in a tax-efficient manner, with management having hinted at share buybacks as a preferred method.
Note: the formula financials not discussed in the body of this report are taken from Bloomberg and some are not adjusted for the HVCC transaction.
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.
Earnings release on 02/26/14 which could address additional value creation strategies; completion of HVCC divestiture and subsequent capital returns to shareholders; ex-JCI integration synergies; strong global auto sales trends.