India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Motherson Sumi Systems
B oard approves acquisition
Event: MSSL board approves acquisition of Peguform/ Wethje Carbon
Motherson Sumi (MSSL) board approves 80% stake acquisition in Peguform
Group (leading supplier of interior/exterior products for auto/other industries with
sales of Euro1.4bn, EBITDA of Euro66.9mn), Germany from Cross Industries AG
(CI; to hold remaining 20% stake) and 50% in Wethje Carbon Composite (WCC;
specialised in carbon composite materials) through an SPV, which will be held
51% by MSSL and rest by Samvardhana Motherson Finance Limited (SMFL).
Impact: Deal size not known yet; synergies from complementary products
Mr Sehgal highlighted that unlikely to be expensive and it is a debt free company
with some working capital and will likely be funded through debt/internal accruals
(our estimate of 4.0-5.5x EV/EBITDA or Euro300-400mn). Business synergies
from complementary products, immediate market share gain, and global presence
is positive (given the business gap). On MSSL’s FY12E EBITDA of Euro147mn,
this will add cEuro34mn (no clarity on non-operating items, restructuring costs).
Action: Reiterate Buy and PT of Rs280; awaiting clarity on deal value
We haven’t changed our estimates, reiterate Buy with a Rs280 price target. In our
view MSSL’s premium valuations will be maintained only on ongoing earnings
momentum, improvement in SMR and clarity on Peguform valuations. We
continue to await the deal details, but take some comfort in the management’s
earlier track record.
Valuation: maintain Buy rating with a price target of Rs280
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool.
\Motherson Sumi approves acquisition of
Peguform/ Wethje Carbon Composite
MSSL board has approved to finalise acquisition of 80% stake acquisition in
Peguform Group, Germany from Cross Industries AG. Cross Industries
would continue to hold remaining 20% stake.
This also includes 50% holding in Wethje Carbon Composite which is a part
of Cross Industries.
Acquisition will be done through a SPV (Joint venture company) in which
MSSL (listed company) will hold 51% stake while Samvardhana Motherson
Finance Limited will hold the balance 49%.
Key takeaways of conference call with
management
We spoke to Mr. VC Sehgal, chairman of Samvardhana Motherson Group to
clarify a few points. Following are the key takeaways:
Acquisition size and valuation: While Mr. Sehgal is not disclosing deal size,
he indicated that going by MSSL track record, the acquisition is highly
unlikely to be expensive.
Funding: Will be done through debt and internal accruals and no equity
dilution on this.
Reason for stake sale by Cross – Peguform was owned by Polytech before
2 years, which filed for bankruptcy and Cross took charge. Cross would want
a partner who can turn-around Peguform.
Synergies for MSSL – Strengthens product portfolio, adds market share,
access to new facilities and technology. So clearly a related acquisition.
Peguform is strong in Germany, Spain, Portugal, Brazil and Mexico.
Management continuity will be intact with Cross retaining 20% stake.
Operational improvement will be a target area, in our view.
Does the company have debt? – Management indicated it does not have
any debt except some working capital.
About Peguform
Was established in 1959, and is a leading supplier of high quality
interior/exterior products for automotive and related industries. According to
MSSL management, strength of the company lies in creating new
applications and innovating new products. According to the MSSL
management, the acquisition would provide new technology and depth to the
polymer product range. This also complements their polymer product range
in India. Also, it is expected by the management to strengthen their position
with customers.
The company reported 2010 sales of Euro1.4bn and EBITDA of Euro66.87m
(margin of 4.9%).
Products include bumper systems, plastic components for vehicle exteriors,
vehicle cockpits, dashboards and vehicle interior trims.
It is the 2nd largest supplier of door panels while 3rd largest supplier of
Instruments panel in Germany. It is a market leader in cockpit assemblies in
Spain.
It has a state of art painting facility in Europe.
It employs nearly 7000 employees and has 200 injection molding machines.
Major customers are Volkswagen, BMW, Porsche, PSA Peugot Citreon,
Renault-Nissan, Daimler and GM.
Company has 22 facilities including 5 module sites - Germany (7), Spain (4),
Portugal (1), Brazil (2), Mexico (1), China (1) and Slovakia (1).
About Wethje Carbon Composites Group
It is a part of Cross Industries which has major presence in automotive sector
It specialises in the development, design, construction and production of
carbon composite materials.
Carbon composite materials used for many years both in motor sport and in
the aeronautics. Wethje is Europe’s first company to apply this technology.
About Cross Industries AG
Austrian holding company having major emphasis on the automotive sector. It
operates in three core areas:
KTM Power Sports AG: Manufacturer of high performance vehicles in offroad
and street sectors.
CROSS Motorsport Systems AG: Supplier of high performance components
for chassis, transmission, motor and aerospace.
Peguform Beteiligungs GMBH: Delivers plastic components and complete
system modules for interior and exterior of vehicles.
UBS initial view
Deal size and transaction value not disclosed by the management, and will
only be indicated after the acquisition is closed. However, Mr. VC Sehgal
indicated it is unlikely to be an expensive valuation, going by MSSL’s earlier
track-record. We likely estimate it could be at 4.0-5.5x EV/EBITDA
(Euro300-400mn). We do await clarity on this issue, as this is critical to
gauge the attractiveness of the valuation. US and European suppliers are
trading at 1 year forward EV/EBITDA of 5.2x-7.2x, Japanese significantly
lower at 3-5x and Indian auto ancillary companies higher at 8-11x multiplies.
EBITDA margins of Peguform are low at 4.9%, but we believe that is where
MSSL has an opportunity to improve operational performance. The
management has been able to turnaround the previous acquisition. A client
driven acquisition gives us more confidence on ability to improve the
performance.
We believe business synergies exist as MSSL is already in the
interior/exterior business – MATE (Indian sub) and Visiocorp (now SMR,
which has injection molding capability and this acquisition will be
complementary and provide access to new technology and add depth to the
polymer product range.
Interiors/exteriors globally is a highly fragmented market and many players
like Plastech, Cadence Innovation and Inteva Products had filed for Chapter
11 in the previous downcycle. So clearly a business gap globally, which
MSSL can tap. Scale and global presence (important for plastics, as suppliers
need to be close to OEMs to supply bulky parts) in our view is a huge
advantage. Low R&D reinvestment needs are there in this business.
Interiors globally were a Euro17.7bn market in 2009, and Faurecia (global
auto comp major) expects market to grow to Euro23bn by 2013.
Cross holding between MSSL (51% in this acquisition) and rest by SMFL
(promoter holding company) makes the business and corporate structure
more complex, in our view. However, for the SMR acquisition done earlier,
MSSL management highlighted the reason for this type of shareholding was
to limit the impact on financials after buying a distressed business, when the
numbers are consolidated. It is likely that their JV partner Sumitomo would
have indicated the same.
We continue to maintain a Buy rating on the stock with Rs280 price target.
We think earnings momentum rather than multiples re-rating will drive the
share price. We like good track record, ability to turnaround acquisitions,
strong capital discipline historically, good dividend pay-out and high return
ratios.
Interior and exterior markets: area of expansion for
MSSL/SMR’s polymer business
Interior products like cockpits, instrument panels, door modules and exterior
products like bumpers, tailgates and body panels are also addressable markets
for MSSL. While its polymer component business contributed only 10.9% of
FY11 consolidated revenue, it is expanding its share in this market. We believe
it can naturally leverage its capabilities in injection and blow moulding at both
MSSL and SMR and its global manufacturing locations to provide integrated
solutions to global OEMs. We expect MSSL and SMR to tap these markets to
expand its content per car. We analyse the potential of the interior and exterior
markets below.
Interior market: low tech, need to produce locally, distressed
assets—all could create opportunities for MSSL and SMR
Faurecia estimated the global interior market at €17.7bn in 2009 and expects it
to grow to €23.0bn (+30%) by 2014, due to product enrichment and growth in
emerging markets and North America. Interiors include cockpits, instrument
panels, door panels, door modules and acoustic systems, each of which has
electronic components. Electronics are one of the fastest growing component
groups in vehicles. McKinsey predicts electronics will increase from 20% of the
value of a car at present to 40% by 2015.
Like seating, many interior components need to be produced locally, even
though they are relatively low tech. Parts such as dashboards are not only too
bulky to be shipped cost effectively but also require significant sequencing
(need to match the vehicle colour scheme, etc). Interior products are typically
low tech in nature and require a limited level of R&D (about 2% of sales, after
the amount billed to OEMs). These components therefore tend to have higher
margins (seating and exhaust in particular).
The end market is quite fragmented and a number of assets are distressed,
particularly in North America, following the decline in auto production, negative
mix shifts and rapid rise in raw material prices. This resulted in several interior
suppliers filing for Chapter 11, including Visteon, Plastech, Cadence Innovation
and Progressive Molded Products.
We think this business has significant growth potential for MSSL, given its
global presence, demonstrated execution ability and the shift of manufacturing
to low-cost countries.
Exterior market: more plastic content per car to make vehicles
lighter
Automotive exteriors include products such as bumpers, tailgates, body panels
and door pillars. These products are low tech in nature and the competitive
advantage comes from global footprint and logistics capabilities. Automakers
are working to make vehicles more lightweight to improve safety. OEMs are
likely to aim to double the weight of plastic in cars by 2018. We believe this will
be positive for MSSL, as it could leverage its global presence and manufacturing
experience in polymer components to expand its content per car in the auto
market.
Motherson Sumi Systems
Motherson Sumi Systems Limited (MSSL) is the flagship listed company of the
Samvardhana Motherson Group (SMG). It was established in 1986 as a joint
venture between SMG and Sumitomo Wiring Systems (Japan). MSSL is one of
the largest auto component companies in India by revenue and is evolving into a
leading global OEM supplier following the 2009 acquisition of Visiocorp
(renamed Samvardhana Motherson Reflectec). The company's key products are
mirrors, wire harnesses and polymer components.
Statement of Risk
We believe the turnaround at SMR and earnings momentum are critical to
Motherson Sumi Systems. We consider volatile raw material prices and foreign
exchange rates and any weakening in the global auto outlook as key risks to the
company.
No comments:
Post a Comment