CS - BWA DLPH Focus

.pdf

School

New York University Stern School of Business *

*We aren’t endorsed by this school

Course

MISC

Subject

Economics

Date

Feb 20, 2024

Type

pdf

Pages

Uploaded by DoctorPheasant3944

US Autos & Auto Parts BWA/DLPH: BWA/DLPH deal likely to close but not guaranteed Automobiles & Components | Earnings BWA ’s 1Q print provided multiple datapoints reminding us why it is one of the blue -chip suppliers. A solid beat, with key highlights in robust outgrowth and better-than-feared decremental margins. Moreover, while the revised DLPH acquisition terms gave BWA a lower- than-anticipated price cut, BWA importantly received a key concession with closing conditions on DLPH leverage. While overall 1Q was positive, we remain on the sidelines on BWA, as we see some risk for the powertrain product set (given product transition), and also as the DLPH acquisition creates a layer of uncertainty for BWA given the significant restructuring required for DLPH. For BWA we maintain our Neutral rating but raise our TP to $33 from $31. For DLPH we maintain our Neutral rating but raise our TP to $11 from $9. Revised deal exchange ratio lower than anticipated, reflects all-stock deal + new closing conditions: BWA and DLPH revised the deal terms, through which they cured DLPH’s breach of the merger agreement through its revolver draw. The exchange ratio was reduced 5% - DLPH owners now receive 0.4307 shares of BWA for each share of DLPH vs prior 0.4534. The exchange ratio is lower than the 15-20% we and others anticipated, reflecting two points: 1. Because the deal is all- stock, BWA’s reduced stock price implies a cheaper purchase price of DLPH; 2. BWA effectively gave up some price concession, in return receiving closing conditions on DLPH leverage which protect BWA and give it an out on the deal if macro significantly deteriorates. Deal still likely to close, but not a guarantee: We believe the resolution of the breach significantly raises the likelihood that the BWA/DLPH deal is closed, and the base case is more clearly that the deal will close…yet we’d argue a closing is not necessarily a slam dunk. DLPH must meet the following closing conditions: 1. Gross revolver draw limit of $225mn; 2. Revolver draw of $115mn net of cash balance; 3. Net debt / EBITDA limit of 6.5x if deal close pre 9/30/20, or 7.5x if deal close on or after 10/1/20. Under our current modeling assumptions, we believe these conditions are feasible for DLPH. The new terms effectively imply a go-forward limit on aggregate DLPH cash burn of ~$220mn – we model only ~$100mn in 2Q-4Q, and DLPH could see benefits through capex or working capital actions. Similarly, we believe the leverage limit is feasible, as we forecast leverage of only ~4.5x at end 3Q/4Q. And if need be, DLPH could take actions by cutting RD&E expense. However, the risk lies if there is a re-emergence of coronavirus disruption, which would drive incremental cash burn / elevated leverage at DLPH….meaning while the deal i s likely to close, it is not fully guaranteed. 8 May 2020 Equity Research Americas | United States DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Research Analysts Dan Levy 212 325 4617 dan.levy@credit-suisse.com Robert Moon 212 325 7112 robert.moon@credit-suisse.com This document is being provided for the exclusive use of DANIEL ARNOLD at SEGANTII CAPITAL MGMT USA LLC

8 May 2020 US Autos & Auto Parts 2 BWA yet another supplier with robust 1Q outgrowth: The central highlight of BWA’s 1Q beat was robust outgrowth of ~11.5pts (organic growth -8% vs. mkt -20%), well in excess of the typical 6-7pts of quarterly outgrowth BWA has posted in recent years, and likely representing one of BWA’s best -ever quarterly outgrowth results. The outgrowth is important, as growth is central to the BWA thesis. Outgrowth was especially pronounced in China (20pts+), with solid outgrowth also in Europe (~+12pts) and NA (~+9pts); among other things, BWA benefited from DCT in China, diesel in Europe, and turbos in NA. The outgrowth is credit to BWA’s backlog. However, we’d note that BWA is one of a n umber of suppliers we’ve seen in 1Q posting robust outgrowth, including APTV, ALV, VC, and Valeo among others. It’s possible that 1Q supplier outgrowth may have in part benefited from OEMs stocking up on components into shutdowns to partially mitigate supply chain risks upon production restart (albeit BWA noted on the call that 1Q did not benefit from component overstocking). Near-term outgrowth may soften amid coronavirus upheaval. Despite the robust 1Q outgrowth, BWA guided 2Q-4Q outgrowth to come down to 150-250bp. We see puts and takes on this. On one hand, we’re inclined to cite BWA’s track record in recent years of conservatism / setting the bar low. That, alongside mgmt. commentary of no major delays, implies upside to BWA’s guidance. However, we pref er not to reflect the growth upside in our model, as we expect coronavirus disruption to limit the volumes of new launches – hence limiting the amount of backlog (i.e. launch volumes in a global production outlook of sub-70mn units will be much less than launch volumes in a global production outlook of 90mn units). Indeed, BWA faced this trend in 2015 when outgrowth softened to ~1pt, in large part due to China and CV market volatility limiting launch volumes. Decremental margin showing benefits of restructuring actions: One of the highlights of BWA’s 1Q beat was a better -than-expected decremental margin of 26%, much better than the high 30% decremental margin we expected amid the upheaval, and helping to drive BWA’s 1Q margin beat. Looking at the segment res ults provides a deeper understanding of BWA’s business – Engine decremental margin of ~20% benefited from ongoing restructuring initiatives, while Drivetrain decremental margin of low 30% was driven by higher R&D expense in the segment (due to electrification investment). BWA noted that the sharp nature of the 2Q production decline will drive a higher decremental margin in the 30% range – which we believe is a fair assumption for 2Q. Yet amid the trend of some suppliers posting better-than-expected decremental margins during the upheaval due to austerity measures, we wouldn’t rule out BWA 2Q decrementals coming in better than the guided 30% range. Intact dividend – part BWA as a blue chip supplier, part deal positioning: BWA is unique amongst auto co’s, as it is part of a limited group of co’s that has maintained its dividend and has not drawn its revolver even in the face of the coronavirus upheaval. We would attribute this in part to BWA’s positioning as a blue chip supplie r, but also in part due to deal positioning. On the first point, we give BWA credit as a higher quality auto co – it expects to post positive FCF this year even in the face of the upheaval and it has one of the lowest leverage ratios amongst auto suppliers (only 0.6x net debt / TTM EBITDA end 1Q). Its dividend is a manageable ~$140mn annual commitment, and can be funded by FCF assuming BWA hits the mid-point of its revised FCF guide. It also has posted a solid track record of execution. Yet at the same time, we also think in part the dividend was maintained / the revolver was not drawn due to positioning in its breach negotiation with DLPH. Even though the negotiation is now complete, we nevertheless expect BWA to maintain the dividend and not draw the revolver. This document is being provided for the exclusive use of DANIEL ARNOLD at SEGANTII CAPITAL MGMT USA LLC

8 May 2020 US Autos & Auto Parts 3 BorgWarner, Inc. Model Update; Raising target price, maintain Neutral rating BWA Target price (12M, US$) 33.00 Neutral [V] Auto Parts & Equipment BWA’s 1Q print provided multiple datapoints reminding us why it is one of the blue -chip suppliers. A solid beat, with key highlights in robust outgrowth and better-than-feared decremental margins. Moreover, while the revised DLPH acquisition terms gave BWA a lower-than-anticipated price cut, BWA importantly received a key concession with closing conditions on DLPH leverage. While overall 1Q was positive, we remain on the sidelines on BWA, as we see some risk for the powertrain product set (given product transition), and also as the DLPH acquisition creates a layer of uncertainty for BWA given the significant restructuring required for DLPH. For BWA we maintain our Neutral rating but raise our TP to $33 from $31. Valuation and risks: We raise our TP to $33 from $31; our revised TP applies a 5.1x multiple on FY’21 EBITDA of $1.45bn. We raise our estimate for FY’20 EBITDA to $1.08bn vs. prior $742mn. Key risks: prolonged production shutdown due to coronavirus, slower than expected global auto recovery post 2020, margin pressure, execution risk around restructuring and potential acquisition actions. Previous target price (12M, US$) 31.00 Price (7 May 20, US$) 27.84 52-week price range 46.31 - 19.73 Market cap (US$ m) 5,771.51 Enterprise value (US$ m) 6,826 [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Dan Levy 212 325 4617 dan.levy@credit-suisse.com Robert Moon 212 325 7112 robert.moon@credit-suisse.com Financial and valuation metrics Year 12/19A 12/20E 12/21E 12/22E EPS (CS adj.) (US$) 4.14 2.02 3.52 4.44 Prev. EPS (US$) - 0.83 2.58 3.65 P/E (x) 6.7 13.8 7.9 6.3 Revenue (US$ m) 10,168.0 8,177.5 10,058.7 11,421.2 EBIT (US$ m) 1,232.0 649.5 1,021.4 1,246.7 EBIT margin (%) 12.1 7.9 10.2 10.9 Organic growth (%) 0.7 -17.6 23.3 13.5 EV/EBITDA 4.1 6.3 4.5 3.6 Net debt (US$ m) 1,128 1,054 760 410 Number of shares (m) 207.31 IC (current, US$ m) 5,972.00 Net debt (Next Qtr., US$ m) 1,128.8 Dividend (current, US$) 0.68 Net debt/tot eq (Next Qtr.,%) 24.1 Source: Company data, Refinitiv, Credit Suisse estimates Share price performance On 07-May-2020 the S&P 500 INDEX closed at 2881.19Daily May09, 2019 - May07, 2020, 05/09/19 = US$38.58 Quarterly EPS Q1 Q2 Q3 Q4 2019A 1.00 1.00 0.96 1.17 2020E 0.77 -0.39 0.78 0.86 2021E - - - - This document is being provided for the exclusive use of DANIEL ARNOLD at SEGANTII CAPITAL MGMT USA LLC

8 May 2020 US Autos & Auto Parts 4 Figure 1: 1Q20 EPS Attribution Source: Company data, Credit Suisse estimates, FactSet 1Q20E $mn ex per share data Actual CS Est. Cons. CS Cons. Y/Y Q/Q 1Q19A 4Q19A Key metrics Revenue 2,279 1,878 2,008 401 271 (287) (280) 2,566 2,559 Organic revenue growth -8.1% -23.4% -19.8% 1527 bps 1170 bps -482 bps -1070 bps -3.3% 2.6% Adj. EBIT 234 80 165 154 69 (61) (106) 295 340 EBIT Margin 10.3% 4.3% 8.2% 598 bps 205 bps -123 bps -302 bps 11.5% 13.3% Adj. EPS $0.77 $0.23 $0.48 $0.54 $0.29 -$0.23 -$0.40 $1.00 $1.17 FCF 146 50 64 96 82 223 97 (77) 49 Revenue Engine 1,434 1,150 1,318 284 116 (164) (99) 1,598 1,533 Drivetrain 860 744 839 116 21 (122) (182) 982 1,042 Eliminations (15) (16) 1 (15) (1) 1 (14) (16) Total 2,279 1,878 2,008 401 271 (287) (280) 2,566 2,559 Y/Y Growth Engine -10.3% -28.0% -17.5% 1775 bps 729 bps -339 bps -973 bps -6.9% -0.5% Drivetrain -12.4% -24.3% -14.5% 1184 bps 210 bps -310 bps -1195 bps -9.3% -0.5% Total Co -11.2% -26.8% -21.7% 1562 bps 1056 bps -334 bps -1060 bps -7.8% -0.6% Y/Y Organic Growth Engine -6.4% -23.7% 1729 bps -459 bps -983 bps -1.8% 3.4% Drivetrain -10.6% -22.3% 1171 bps -497 bps -1213 bps -5.6% 1.5% Total Co -8.1% -23.4% -19.8% 1527 bps 1170 bps -482 bps -1070 bps -3.3% 2.6% Adj. EBIT Engine 208 105 167 103 41 (33) (56) 241 264 Drivetrain 63 29 64 34 (1) (42) (73) 105 136 Eliminations (37) (54) 17 (37) 14 23 (51) (60) Total Co 234 80 165 154 69 (61) (106) 295 340 Adj. EBIT Margin Engine 14.5% 9.1% 12.7% 538 bps 185 bps -58 bps -272 bps 15.1% 17.2% Drivetrain 7.3% 4.0% 7.6% 337 bps -28 bps -337 bps -573 bps 10.7% 13.1% Total Co 10.3% 4.3% 8.2% 598 bps 205 bps -123 bps -302 bps 11.5% 13.3% Below the line / Other Equity income 5 9 (4) (4) (2) 9 7 Net interest expense 10 9 13 1 (3) (1) 1 11 9 Other expense / (income) 2 0 2 (7) 0 9 Pretax Income 227 80 144 147 83 (66) (102) 293 329 Tax 60 21 37 39 23 (14) (9) 74 69 Tax rate 26.6% 26.5% 25.7% 8 bps 84 bps 118 bps 556 bps 25.4% 21.0% Noncontrolling interest, other 8 12 (4) 8 (3) (9) 11 17 Adj. Net income 159 47 107 112 52 (49) (84) 208 243 Adj. EPS $0.77 $0.23 $0.48 $0.54 $0.29 ($0.23) ($0.40) $1.00 $1.17 Shares Outstanding 206 205.5 0.7 -0.9 -0.7 207 207 Free Cash Flow 146 50 64 96 82 223 97 (77) 49 Delta vs. Change Historicals This document is being provided for the exclusive use of DANIEL ARNOLD at SEGANTII CAPITAL MGMT USA LLC

8 May 2020 US Autos & Auto Parts 5 Figure 2: Summary Model (Income Statement) Source: Company data, Credit Suisse estimates Income Statement, $mn (ex per share data) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20E 3Q20E 4Q20E 2017 2018 2019 2020E 2021E 2022E 2023E Revenue 2,566 2,551 2,492 2,559 2,279 1,250 2,303 2,346 9,799 10,531 10,168 8,177 10,059 11,421 12,235 Gross Profit 519 513 524 545 447 29 431 446 2,119 2,231 2,101 1,353 1,927 2,275 2,479 Gross Margin 20.2% 20.1% 21.0% 21.3% 19.6% 2.3% 18.7% 19.0% 21.6% 21.2% 20.7% 16.6% 19.2% 19.9% 20.3% Operating Income, Non-GAAP 295 303 294 340 234 (74) 234 255 1,217 1,298 1,232 650 1,021 1,247 1,378 Adj. operating margin 11.5% 11.9% 11.8% 13.3% 10.3% -5.9% 10.2% 10.9% 12.4% 12.3% 12.1% 7.9% 10.2% 10.9% 11.3% Net interest expense 13 13 13 13 13 13 13 13 65 54 52 52 52 52 52 Pretax Income, Non-GAAP 2,861 2,854 2,786 2,899 2,513 1,176 2,537 2,601 11,016 11,829 11,400 8,827 11,080 12,668 13,612 Provision for taxes, Non-GAAP 74 73 74 69 63 (8) 62 68 340 286 291 186 270 331 366 Effective tax rate 25% 25% 26% 21% 27% 10% 27% 27% 28% 22% 24% 29% 26% 26% 26% Net income, Non-GAAP 208 208 199 243 160 (81) 161 177 822 941 857 416 717 891 990 Net Margin 8.1% 8.1% 8.0% 9.5% 7.0% -6.5% 7.0% 7.5% 8.4% 8.9% 8.4% 5.1% 7.1% 7.8% 8.1% Shares Outstanding, Diluted 207 207 206 207 206 206 206 206 212 210 207 206 204 201 197 EPS, Non-GAAP $1.00 $1.00 $0.96 $1.17 $0.77 ($0.39) $0.78 $0.86 $3.88 $4.49 $4.14 $2.02 $3.52 $4.44 $5.04 Dividend per share $0.17 $0.17 $0.17 $0.17 $0.17 $0.17 $0.17 $0.17 $0.59 $0.68 $0.68 0.68 $ 0.68 $ 0.68 $ 0.75 $ Payout ratio 17.0% 16.9% 17.6% 14.5% 22.0% -43.3% 21.8% 19.8% 15.2% 15.1% 16.4% 33.7% 19.3% 15.3% 14.9% Depreciation and amortization 107 107 110 115 112 106 106 107 408 431 439 431 430 451 483 EBITDA, Non-GAAP 402 410 404 455 346 33 340 362 1,625 1,729 1,671 1,081 1,451 1,698 1,861 Adj. EBITDA margin 15.7% 16.1% 16.2% 17.8% 15.2% 2.6% 14.8% 15.4% 16.6% 16.4% 16.4% 13.2% 14.4% 14.9% 15.2% Y/Y Change Revenue -7.8% -5.3% 0.5% -0.6% -11.2% -51.0% -7.6% -8.3% 8.0% 7.5% -3.5% -19.6% 23.0% 13.5% 7.1% Adj. EBIT -13.0% -11.1% 0.3% 4.8% -20.7% -124.3% -20.4% -24.9% 9.3% 6.6% -5.1% -47.3% 57.3% 22.1% 10.5% Adj. EBITDA -10.3% -8.9% 0.8% 5.8% -13.9% -92.0% -15.8% -20.5% 8.0% 6.4% -3.4% -35.3% 34.3% 17.0% 9.6% Net Income -10.4% -16.2% -4.7% -4.0% -23.1% -139.0% -19.0% -27.2% 16.8% 14.6% -9.0% -51.4% 72.3% 24.3% 11.1% EPS -8.8% -15.0% -3.6% -3.3% -22.8% -139.1% -19.0% -27.0% 18.7% 15.7% -7.8% -51.3% 74.3% 26.2% 13.4% This document is being provided for the exclusive use of DANIEL ARNOLD at SEGANTII CAPITAL MGMT USA LLC

8 May 2020 US Autos & Auto Parts 6 Figure 3: Summary Model (Segment Model) Source: Company data, Credit Suisse estimates Segment Model, $mn 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20E 3Q20E 4Q20E 2017 2018 2019E 2020E 2021E 2022E 2023E Revenue Engine 1,598 1,569 1,514 1,533 1,434 766 1,382 1,398 6,061 6,448 6,214 4,980 6,029 6,711 7,006 Drivetrain 982 998 993 1,042 860 499 936 962 3,790 4,141 4,015 3,257 4,090 4,770 5,289 Eliminations (14) (16) (15) (16) (15) (15) (15) (15) (53) (57) (61) (60) (60) (60) (60) Total 2,566 2,551 2,492 2,559 2,279 1,250 2,303 2,346 9,799 10,531 10,168 8,177 10,059 11,421 12,235 Revenue Growth, Y/Y Engine -6.9% -6.3% -0.1% -0.5% -10.3% -51.2% -8.7% -8.8% 8.4% 6.4% -3.6% -19.9% 21.1% 11.3% 4.4% Drivetrain -9.3% -3.5% 1.6% -0.5% -12.4% -50.0% -5.7% -7.7% 7.6% 9.3% -3.0% -18.9% 25.6% 16.6% 10.9% Total -7.8% -5.3% 0.5% -0.6% -11.2% -51.0% -7.6% -8.3% 8.0% 7.5% -3.5% -19.6% 23.0% 13.5% 7.1% Organic Revenue Growth, Y/Y Engine -1.8% -0.4% 4.6% 3.4% -6.3% -48.7% -7.4% -7.5% 7.7% 3.6% 1.3% -17.6% 21.3% 11.3% 4.4% Drivetrain -5.6% 0.2% 4.1% 1.5% -10.6% -48.0% -4.8% -6.8% 13.9% 6.8% -0.1% -17.5% 25.8% 16.6% 10.9% Total -3.3% -0.3% 4.4% 2.6% -8.0% -48.7% -6.4% -7.3% 10.1% 4.8% 0.7% -17.6% 23.3% 13.5% 7.1% Market weighted growth -4.9% -6.8% -2.0% -5.1% -21.6% -50.4% -6.9% -9.5% 0.3% -1.3% -4.8% -24.4% 19.3% 6.5% 3.0% Outgrowth vs market 162 bps 649 bps 640 bps 774 bps 1358 bps 173 bps 50 bps 226 bps 973 bps 608 bps 552 bps 679 bps 396 bps 708 bps 414 bps Adj. EBIT Engine 241 249 241 264 208 33 197 210 994 1,040 995 648 879 1,002 1,055 Drivetrain 105 102 100 136 63 (77) 71 82 449 476 443 139 322 445 522 Corporate/Other (51) (48) (47) (60) (37) (30) (34) (37) (227) (219) (206) (138) (180) (200) (200) Total Operating Income 295 303 294 340 234 (74) 234 255 1,217 1,296 1,232 650 1,021 1,247 1,378 Adj. EBIT Margin Engine 15.1% 15.9% 15.9% 17.2% 14.5% 4.3% 14.3% 15.0% 16.4% 16.1% 16.0% 13.0% 14.6% 14.9% 15.1% Drivetrain 10.7% 10.2% 10.1% 13.1% 7.3% -15.4% 7.5% 8.6% 11.9% 11.5% 11.0% 4.3% 7.9% 9.3% 9.9% Total Operating Margin 11.5% 11.9% 11.8% 13.3% 10.3% -5.9% 10.2% 10.9% 12.4% 12.3% 12.1% 7.9% 10.2% 10.9% 11.3% Memo: R&D 104 113 102 94 109 88 102 104 408 440 413 403 443 503 526 R&D as % of revenue 4.1% 4.4% 4.1% 3.7% 4.8% 7.0% 4.5% 4.5% 4.2% 4.2% 4.1% 4.9% 4.4% 4.4% 4.3% This document is being provided for the exclusive use of DANIEL ARNOLD at SEGANTII CAPITAL MGMT USA LLC

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version