FinnvedenBulten AB (FBAB) is an auto supplier selling mostly fasteners and metal components for passenger cars and trucks primarily in Europe (with Sweden being the largest market).

We see FBAB as a significant beneficiary of European automotive recovery – European passenger car and light truck sales have started stabilizing/improving after having declined on a year-over-year basis, with the exception of one month, for 19 consecutive months up to the end of 1H13. Furthermore, FBAB sports a 4% dividend yield and trades at ~6x '15 consensus estimates, based on a current price of SEK 50 (which compares to an IPO price of SEK 49 in May 2011 – note that the global auto supplier group has had a total return of close to 34% since then, as measured by the Bloomberg Global Auto Parts Peers Index).

The thesis hinges on European auto recovery and lower cost base from restructurings.

Business:

FBAB operates in two divisions, Bulten (fasteners; about 60% of revenues) and Finnveden Metal Structures (steel, magnesium and aluminum products, used for die casting, stamping and joining; approx 40% of sales).  Its main customers include Volvo, Scania, and Ford.  Passenger cars are roughly 75% of sales, with trucks accounting for the balance.

In our opinion, Bulten is the crown jewel, where it should experience most of the growth going forward, and is also less volatile than the metal structures business.  The fastener market in Europe is US$15B, of which approx 26% is attributed to the automotive market.  A typical vehicle will use 1,500-2,000 fasteners each, and the total fastener content cost is EUR 100 per passenger vehicle (and EUR 400 per truck).  Competitors in Europe include Nedschroef (Netherlands-based) and Kamax (German-based, which has a JV with French manufacture A Raymond – Facil). These two, along with Bulten are one of 3-4 fastener manufacturers in Europe that can take complete responsibility along the entire value chain, from product development to final delivery into the customer’s product line – known as Full Service Providers (FSP).  Bulten is known for high quality service and can supply all the fasteners a customer needs (one point of contact), even for pieces they do not manufacture, at competitive prices.  60-70% of Bulten sales are probably linked to the full service concept.

Note that Company can pass through material costs such as aluminum, magnesium and steel, but not energy costs.  

Synergy between both divisions is limited.  However, we feel that a separation is currently not being contemplated by management.

FBAB's targets organic growth above the industry average, an operating margin of 7%+, ROCE of 15%+ and to payout 1/3 of net earnings as dividends.

Note that in 2011, it posted adjusted operating margin of 7.1% and ROCE of 15.4%. Subsequent margin pressure came from temporary de-stocking at a major undisclosed customer (adjusting inventory levels likely due to European weakness; impact was mainly in 4Q12 and 1Q13 – Bulten has gained market share in 2Q13 and 3Q13) and also from charges to move for lower cost structure (this is mainly moving certain production from the metals structure division – the magnesium die casting – from Sweden to Poland: it currently has two die casting foundries in Sweden, which are currently unprofitable, and will shift one to Poland and look to sell the other; while some of the costs are non-recurring, it has impacted production levels).  Relocation expected to be completed at the end of 2013/early 2014, with full benefit in 2H14. 2012 was a start and stop year with irregular pattern of demand by customers given the environment, which impacted margins (not surprisingly, it is better to operate under a smooth production pattern).

Momentum:

In fact, in the 2H of 2013, FBAB announced various new orders with existing and new customers totaling SEK510 million of incremental revenue. In addition, the JV in Russia is expected to contribute up to 90M starting 2014. A significant portion of the 510M is supposed to be as Full Service Provider, which commands higher margin.  In addition, part of the sales are related to a higher margin new fastener which is essentially a self-taping screw and does not require a washer, contributing to lower weight for the vehicle.

Russian JV on track and production set to start in 1H14 pending governmental approval.

Valuation:

FBAB is currently doing around SEK 3B in revenues with a 4%+ operating margin.  If we assume the SEK 510M of additional sales comfortably carry a 15% incremental margin, plus SEK 20M in benefit from the move to Poland (expected to be between SEK 15-35M), we get to their 7% operating margin target.

FBAB should be able to grow organically at 2-5%, but even assuming flat sales, with a run rate benefit of the announced sales in 2015, we get an EBIT of SEK 245M.  At an 8x multiple, which is a significant discount to other Swedish auto suppliers, we get to a price target of SEK 83, or over 60% upside.  In addition, at that level of operating margin, and fully taxed, FBAB would be trading at close to a 5.5% dividend yield if it paid out 1/3 of its net income in dividends, which is its targeted policy.

Note we are not factoring a recent (Nov 2013) ruling confirming a benefit of SEK123M in NOLs by the Swedish Supreme Administrative Court (related to ability to deduct past interest on a shareholder loan).

Optionalities:

FBAB has been setting up JVs in Russia (with GAZ; will be the first foreign supplier of fasteners in the market – hard to find high quality fasteners locally and import tariffs are high) and China (for metal structures; should become more meaningful starting 2015), which are fast growing auto markets

Could see further gains in China given long-standing relationship with Volvo

Risks:

Illiquidity of stock (free float is roughly 55% excluding insiders and large holders such as Nordic Capital, a private equity fund focused on the Nordic region, which owns over 1/3 of the Company)

Stalling recovery in Europe which could compromise the sustainability of the dividend

Customer concentration - top 3 customers account for roughly 2/3 of sales

The heavy truck side could have experienced some forward buying in late 2013 from a transition to the Euro VI emission standards that comes into effect January 1, 2014, which could negatively impact production in early 2014

Catalysts:

Operating leverage from European auto recovery

Restructuring lowering cost base

Operating leverage from European auto recovery

Restructuring lowering cost base