Description

ü  Spinoff dynamics short -  A check mark trading pattern is coming at Faurecia, the auto parts manufacturer, who’s largest shareholder (Stellantis – STLA) is spinning off 54.3m shares to its holders (record date March 16th, pay date April 1^st).  The April Fools joke in this is a miniscule 0.017 : 1 spin ratio.  

ü  Odd spinoff ratio - The spin ratio is tiny so holders will get a rounding error sized position amounting to 1.7% of their shares in Stellantis, and sub 5% by value.  Many will kick it out just because of immaterial sizing.

ü  Holder base is large and diversified -  Stellantis, the recently merged Fiat-Peugeot entity, is the 4^th largest automaker.  The merger closed in January, and this spin is part of the merger considerations payable to holders along with €308m of cash dividend from earlier sales of Faurecia shares.  The spin is conditional “for now” until shareholder consents, expected to be confirmed at the Monday, March 8^th Extraordinary General Meeting.  They must know they have the vote in hand, because yesterday the company announced the spin publicly.

ü   Low trading volume relative to the spin – Daily trading volume at Faurecia averages 503k shares a day.  Assume 1/3^rd of the spin shares are subject to six-month lockup for insiders (Peugeot and Fiat Family entities, French gov, and DongFeng Motor), but the rest, or 36.17m shares, are able to come to market.  I am expecting much of it immediately.  This overhang amounts to 26% of EO FP shares, or 71.8 days of trading!
                If even a quarter of the shares come promptly to market, that is a share overhang of ~18 days of trading.  Indexes will have to sell immediately.  There is an X-large cap/Mid cap mismatch that will require many mutual funds to sell.  And plenty of holders who signed up to buy an automaker, do not necessarily want a low margin auto parts supplier.  Lastly, there are panicky holders who see the size of the share overhang and just will want to get out of the way.

ü  Is the overhang intentional? -  Peugeot owned the shares for years before the merger with Fiat, and I suspect the Peugeot family, who has a history with Faurecia going back decades, will use the overhang they have created to pick up shares as they are dumped.  There are three Faurecia board members who are also at Stellantis including Vice Chairman Robert Peugeot.  The design for this spin came from the Peugeot side of the negotiations.  The French Gov presumably will not be selling, but the Exor (Fiat family) and DongFeng shares might come to market in 6 months.

                In Joel Greenblatt’s book, You Can Be A Stock Market Genius, which I assume everybody on this site has read, there are discussions of just such intentional situations for spin-offs, restructurings, & merger securities… and this touches all three.  I believe this is one of those intentional situations.

                So, there are two waves of selling to come, the first in April, and phase two upon unlock potentially in October.

ü  Longer Term, the upstroke – While the above spin dynamic presents the downstroke of the ü, there is a brighter long-term future for Faurecia.  I intend to be short EO FP for the spin dynamics, and then find a point at which to turn around and go long… the upstroke.

ü Operations -   Currently things look bad after a tough covid filled year that saw material declines and the dividend cancelled.  There are 4 divisions which together did €14.6B of sales last year, down 17.5%: 

                                         % of Sales       Sales                       Operating Margin

Division                               2020       2019       2020                   2019       2020      

Seating                                 38%       €7.0B     €5.6B                     6.5%      3.4%

Interiors                               31%       €5.3B     €4.5B                     5.5%      0.4%

Clean Mobility                      26%        €4.6B     €3.8B                     11.3%    5.3%

Clarion Electronics                5%        €0.8B     €0.7B                     1.5%      -0.7%

Regionally:                                                    2020                   2019       2020

Europe                                  47% of sales    = €7.0B                    6.5%      1.0%

North America                        25%               = €3.6B                    6.3%      0.9%

Asia                                       24%               = €3.5B                    9.9%      8.7%

South America                          3%               = €0.4B                    6.9%      -1.4%

The weak 2020 margins belie a better second half which brought them back from the covid brink in the first half, and imply margin improvement already has momentum, even if it is hard to see at the moment.

ü     Investor Day - Recently, on Feb 22^nd, they held an Investor Day which focused on the opportunity before them to 2025, where they expect EPS of €9-10.   Comparatively, 2019 was a decent year, and covid-impacted 2020 basically stunk.  2019 EPS was €4.27, and 2020 EPS was -€2.75.  Looking out to 2025, they expect top line growth of over 5% annually with EBIT margin climbing above 8% based on operating leverage and cost savings.  2019 EBIT Margin was 7.2%, and 2020 was only 2.6%, in a year when sales fell 17.5% and operating income was down 68.3%.

ü  Guidance - Growth plans call for for top line improvement though market recovery and increased order intake out through 2025.  Operating margins of 8% in 2022, and above in 2025 for a cumulative 5 year cash flow of over €4B, driving deleveraging.  EBITDA of > €2.7B in 2022, and €3.6B in 2025.  Cost reductions achieved in 2020 of €145m recurring fixed cost savings, and another 200m by 2022 put operating margins on trend.  Ambition of being Carbon Neutral by 2030, and progress achieved on gender diversity.       

Operating margins:                                          Revenues:

ü  Financial Stability – There is €6.2B of Debt at year end, but €3.1B of Cash, and net debt to ebitda was 1.9X.  Plus, there is an undrawn credit facility of €1.2B.  The average cost of debt is < 2.8%. 

 Maturities are light for the next few years until 2025:

 With some lift in EBITDA they should be able to further de-lever to 1.5X by this year end, and 1X by year end 2022, targeting improved credit ratings (currently BB+). 

 Also (and maybe offsetting), they expect to return to their historical practice of paying dividends with a proposed €1 per share for June 2021.

ü  Future prospects – The Clean Mobility and Electronics divisions position the company well to serve the high growth areas of the future.  They stand to participate meaningfully in the fastest growing addressable markets, which are forecast to grow to €120B by 2030, including solutions for Hydrogen Mobility, ultra-low/zero emissions and the 5G-connected “Cockpit of the Future”.  These divisions will help accelerate electrification and advance the drive assistance systems on the road toward autonomous driving.  

Their leadership in Hydrogen Mobility is a huge opportunity and is expected to grow exponentially as product cost reductions and time to market improvements drive meaningful cost of ownership reductions for consumers and businesses.  

The company expects increased content per vehicle in each business group with strong growth in premium, electric, and commercial vehicles.  Also, they expect to double sales in China to €5B, which is already a higher margin segment of the business.   

Faurecia is already in deep with Peugeot, but the Stellantis merger brings better opportunities to penetrate the Fiat side of the business.  Already they have won business for seating from the new Jeep Grand Wagoneer.

Investments in these initiatives saw spend on innovations of €607m over the past three years, with another €1.1B to be spent between 2021-2025

Catalyst

Downstroke:

·         Fear of overhang coming on April 1 spin date

·         Index and mutual fund selling, other holders who didn’t sign up for an auto supplier

·         Odd spin ratio

Upstroke:

·         Improving sales & margins

·         Traction on new initiatives in Hydrogen Mobility and Cockpit of the Future

·         Deleveraging & credit rating improvements