Description

Short and simple thesis here. Montana Aerospace is an overlooked beneficiary of the ongoing civil aerospace recovery, with a pending catalyst.

The business is overlooked for two core reasons: (1) small float at CHF 340m due to its 52% chairman owner and (2) hugely dilutive and non-strategic non-aero division that is about to be carved out.

On 8x normalized EBITDA (14% margins) the aerostructures business is worth CHF 19/share and a SOTP of the whole business is worth CHF 23.50/share.

This is a quick look at Montana’s unique situation. I assume you are familiar with the unit economics and demand drivers for civil aero suppliers. There are plenty of recent VIC write-ups discussing this sector. Or look at my 2020 write-up of Senior PLC.

Overview

Montana IPO’d in May 2021 at CHF 25.65, issuing 17m new shares to raise CHF 440m earmarked for M&A to consolidate Tier-2 civil aero suppliers. They’ve since executed on this strategy, most notably by acquiring ASCO in 2022, a supplier originally set to be acquired by Spirit Aerostructures before the deal fell through during Covid.

The IPO of Montana Aerospace was the final liquidity event for private holding company Montana Tech Components (MTC), controlled by Michael Tojner, described further below. MTC previously IPO’d Varta AG and Aluflexpack AG. As the last IPO, somewhat bizarrely, Montana Aero includes a substantial copper wire business called ASTA that has nothing to do with the aero operations. 

This, in addition to the prolonged civil aero supply chain recovery, has hurt Montana since its IPO. But the board is now doing something about it. In April the company said it was “evaluating options” including an IPO of ASTA. On June 22nd ASTA held a capital markets day to introduce the business as a stand-alone operation. Later this summer the company will announce its separation plan, which will probably be a spin on the Austrian exchange. Montana will still be a material shareholder of ASTA but an IPO should separate the two companies' valuations.

ASTA (copper wires)

ASTA is 36% of group sales and 25% of EBITDA, with 5% normalized margins but high-teen ROCE.

ASTA primarily produces an insulated copper flat-wire called CTC (continuously transposed conductors) used in electricity generation and transmission. The company claims that ⅓ of global power generation and transmission runs through copper wires produced by ASTA. There are 6 manufacturing sites globally, with the major European facility currently moving from Austria to lower-cost Bosnia. There’s a bit of know-how involved in creating CTS, but this is definitely a commoditized business.

Division management have the ambition of increasing sales to €1bn from circa €550m this year, and of increasing margins from low single digits to high single digits. Capex is low at ~1% of sales and the high-teen ROCE is trending higher as the mix shifts more towards mobility (EV and trains). There is no copper input cost exposure as all contracts are fully hedged or pass-through.

This division is worth 10%-15% of the enterprise value, and can effectively be ignored. While it appears to be a decently-run and dominant CTC manufacturer with low capital intensity and reasonable ROCE, its eventual separation from the aerospace business will be a positive event.

Montana Aero (ex-ASTA)

Aerospace and automotive structures are 64% of group sales and 75% of EBITDA, with low-teen margins that should recover to mid-teens as OEM delivery rates increase.

Montana Aero was founded as a roll-up strategy of Tier-2 civil aero suppliers These are primarily build-to-print aerostructure businesses, but include critical components like fuselage systems, engine rings and landing gear. Montana has contracts on all major civil platforms. As Airbus and Boeing monthly deliveries gradually recover, so too do Montana’s revenue and earnings. 2023 aero sales are guided to increase >15% organically. Additionally inventory levels are normalizing as the supply chain recovers, providing a working capital benefit.

This is a well-diversified Tier-2 supplier, with a slightly differentiated model of using vertical integration and nearshoring to simplify supply chains. Montana will acquire and collapse 3-5 suppliers previously involved in a particular component, leading to shorter delivery cycles and lower costs for OEMs. There is limited I.P. but a strong reputation as a reliable build-to-print provider in a sector with serious and ongoing supply shortages. 

In addition to the large ASCO acquisition of 2022 (which was largely funded with equity issued at €16.28/share), the company has completed a cumulative €650m growth capex program across 2018-2022 to provide capacity expansion and geographic optimization (nearshoring to clients). Guidance is for maintenance capex of €50-60m p.a. going forward.

The automotive structures business (“e-mobility”) is 13% of sales and 18% of EBITDA. It focuses on lightweight structures and battery housing for EVs. It is perhaps worth 10% of the EV.

Balance Sheet

Following the growth capex program, mgmt now claim to be focused on cash generation and debt restructuring. Montana has €674m of gross financial debt, including €483m of mostly variable rate promissory notes with the parent company MTC which will be restructured to public/bank financing, likely this year. The 1Q23 results explicitly state that “positive changes in the financial result are expected within the next months, once the restructuring of the debt position has been achieved.” This is a possibly overlooked catalyst in addition to the separation of ASTA. Montana spent €33m on interest expenses in 2022.

Net financial debt is fine, at circa €220m YE23 or 1.6x the midrange of mgmt’s FY23 guided EBITDA. The issue seems to be uncertainty over the company’s ability to access public markets at competitive rates. The company naturally de-levers >0.5x p.a. from both EBITDA growth and cash generation. I expect they will restructure their debt without issue later this year. There is room to optimize the gross debt/cash positions.

Leadership and Parent Company

Billionaire Austrian entrepreneur Michael Tojner created Swiss-registered Montana Tech Components (MTC) in 2006 as a “technology and innovation industrial holding company.” MTC is private but has issued debt and publishes audited financials. It consolidates its three publicly listed holdings, owning 52% of Montana Aerospace, 50% of Varta (2018 IPO) and 54% of Aluflexpack (2019 IPO). MTC has collateralized its €1.4bn of gross debt against these holdings and has to maintain EV/EBITDA covenants.

No real insight on Tojner, who seems to have made his early money in real estate and online gambling. He was implicated in a pay-to-play court case in Austria, for which he and the accused politician were acquitted this January, but not a good look. MTC clearly wants to de-lever and refinance borrowings to its 3 public subsidiaries. There’s obviously a share overhang risk here, especially given debt at MTC. 

At Montana Aerospace, Co-CEO Michael Pistauer is a financially-focused operator airdropped in from the parent company. He was involved in the IPO of all three MTC subsidiaries, including acting as CFO of Varta AG 2016-2018. The other Co-CEO, Kai Arndt, is a 30-year Airbus veteran. The board and mgmt are paid reasonably.

Michael Tojner co-chairs the board along with Tom Williams, a 20 year vet from Airbus who retired as COO and has also worked with Rolls Royce, Cummins Engines and BAE Systems.

Valuation

FY23 guidance is for >15% revenue growth to €1.5bn across all divisions, led by aerostructures. EBITDA is guided to be between €130m-150m. Capex will decline materially, from an average €100m/yr the past 2 years to €50m-60m. Positive earnings momentum should continue for the next 2-3 years as civil aerospace delivery rates recover and facility utilization rates normalize.

On recovered Airbus and Boeing delivery estimates by 2025 Montana could do €1.9bn in sales, €1.3bn of which will be the aero and auto structures businesses. On normalized 14% margins the structures businesses will do €185m of EBITDA. Taking the low-end of more established competitor valuations you can apply 8x EBITDA for €1.5bn EV and €1.3bn equity value, or €20/share for the aero/auto businesses alone. The copper wire business is worth something above zero.

A basic SOTP gets you to a similar valuation:

Catalyst

-pending final decision about the separation of ASTA

-successful refinancing of promissory notes from parent

-ongoing recovery of civil aerospace monthly delivery rates

-some sort of corporate action to realize values by controlling shareholder