Motorcar Parts of America Inc. MPAA
May 13, 2011 - 10:10am EST by
cuyler1903
2011 2012
Price: 14.84 EPS $0.00 $0.00
Shares Out. (in M): 12 P/E 0.0x 0.0x
Market Cap (in $M): 185 P/FCF 0.0x 0.0x
Net Debt (in $M): 78 EBIT 0 0
TEV ($): 263 TEV/EBIT 0.0x 0.0x

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Description

Motorcar Parts of America, Inc. (MPAA) is an undercovered, largely unknown, consistently growing and highly profitable aftermarket auto part company that announced on Monday the closing of an extraordinarily accretive acquisition of a complementary Canadian company, Fenwick Automotive, at a very low purchase price (est. 2.6x pro forma EBITDA), more than doubling the company's revenues and nearly doubling the company's EBITDA on a pro forma basis.  This acquisition should set the stage for a major revaluation of the company's equity from $14.84 to ~$25 as the market begins to understand the impact of this transaction, creating estimated potential appreciation of 65-70% from current levels.  The stock only advanced modestly on the announcement as the impact of the transaction on valuation is not clear without doing more digging into the 8-K filed yesterday.  Prior to the transaction, MPAA was cheap on a standalone basis, trading at 4.6x NTM EBITDA.  On a pro forma basis including the synergies MPAA's CEO categorized as "at least" $20mm in the press release, MPAA is a company that we estimate has over $63mm of forward EBITDA and $2.38 of forward EPS, implying valuations of 4.0x EBITDA and 6.2x P/E.  We believe the company is worth 6.5-8.0x EBITDA and 10-15x P/E (we model at the low end) due to the recurring revenue nature of the business.  To that point, MPAA's CEO, Selwyn Joffe, has been accumulating shares in recent months through stock option exercise with cash (i.e. appears to not have sold shares to cover the cost of exercise).

 

MPAA Overview:

  • Leading producer and supplier of remanufactured and new alternators and starters ("under the hood" products) for imported and domestic vehicles, including automobiles, light trucks and heavy duty applications which includes industrial and agricultural for the North American Aftermarket
  • Products are sold to leading automotive retailers, traditional market warehouses and to OEMs for their warranty replacement and aftermarket programs
  • MPAA is hq'd in Los Angeles with facilities located in Tennessee, Mexico, Malaysia and Singapore - 100% direct ship capability from Mexico
  • 1400 of its 1700 employees are offshore/non-US, over 97% of its manufacturing is offshore and the company has only utilized 50% of its available capacity
  • Large target market, with #3 MPAA having est. 20% share in its markets (comps Remy and BBB as #1 and #2 players)
  • Aging vehicle population drives long-term replacement demand
  • 12,000 store retail distribution base plus professional installer market plus 4 major OEMs
  • Strong history of revenue and EBITDA growth
  • Minimal capex (only $1.4mm on LTM basis)
  • For detail on the company and industry, including financial data, there is an excellent presentation here from March 2011: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDE4OTYyfENoaWxkSUQ9NDMyMTAwfFR5cGU9MQ==&t=1
  • Good article on aftermarket auto part M&A here: http://www.thedeal.com/magazine/ID/035691/insights/riches-in-the-afterlife.php

 

The Fenwick Acquisition: 

  • Fenwick Automotive Products, a Canadian company that is the 2nd largest supplier of new and remanufactured units in most of their "under the car" categories, including steering components (pumps, gears, racks), brake calipers, master cylinders, hub assembly and bearings, clutches and clutch hydraulics, constant velocity drive shafts, water pumps, control arms and loaded struts)
  • In August 2010, MPAA announced that it made a CAD$2.0 million strategic loan (subsequently increased to CAD$5.0 million) to Fenwick. With this loan came the option to acquire 100% of Fenwick for 360,000 shares of MPAA stock and MPAA agreed to inject a cumulative CAD$10 million in the Fenwick http://www.irconnect.com/mpaa/pages/news_releases.html?d=221286
  • Per press release: "The acquisition is expected to more than double consolidated revenues. In addition, the company expects to achieve annual savings of at least $20 million once the acquisition is integrated, which is expected to be completed within a two-year period. Management anticipates Fenco will contribute at least $25 million of annual EBITDA from the existing revenue base once integration is complete."
  • Including new Fenwick credit facility (for conservatism, assume fully drawn), total purchase price of $65mm ($5mm of stock + $10mm term loan + $50mm revolver) of $65mm is equal to 2.6x management's estimated "at least" $25mm pro forma EBITDA from Fenwick, including "at least" $20mm of synergies
  • Hard synergies are realized by moving Fenwick remanufacturing from Canadian & US facilities to MPAA's existing Mexican and Malaysian facilities (which have 50% excess capacity), and MPAA made an intercompany loan of $10mm to Fenwick to facilitate this transition, drawn on MPAA's previously undrawn line of credit
  • New $10mm term loan and $50mm revolving credit facility at Fenwick at L + 5.50%
  • Fenwick owners agreed to 18 month lockup on their MPAA shares

 

Pro Forma MPAA capital structure:

Stock Price                     $14.84

Shares Out                      12.46

    Market Cap                $185

 MPAA debt                         8

 MPAA revolver                   10

 MPAA cap leases                 1

 MPAA cash                         (1)

 Fenco term loan                10

 Fenco revolver                  50

 Fenco cash                          -  

    TEV                              $263

 

LTM MPAA EBITDA             $30           per Capital IQ

NTM MPAA EBITDA              38           per Capital IQ

LTM Fenwick EBITDA           5            per press release

Synergies                           20           "at least" per press release

Pro Forma LTM EBITDA       55

Pro Forma NTM EBITDA   $63

 

LTM MPAA Net Income      12.65      per Capital IQ

NTM MPAA Net Income      17           estimated

Fenwick Net Income           3            est per MPAA/Fenwick loan agreement

After-tax synergies           10           estimated based on $20mm pre-tax synergies

Pro Forma NTM NI             29.65

Shares Out                       12.46

Pro Forma NTM EPS        $2.38      estimated

 

Potential Value

 

Pro Forma NTM EBITDA    $63

Multiple                              6.5

   TEV                                 410

Less MPAA term loan          (8)

Less MPAA/Fenco loan       (10)

Less MPAA cap leases         (1)

Plus MPAA cash                   1

Less Fenco term loan          (10)

Less Fenco revolver            (50)         conservatively assumed fully drawn

   Equity Value                     332

   Shares Out                      12.46

      Share Value               $26.61

 

Pro Forma NTM EPS            2.38

Multiple                               10

   Share Value                  $23.80

Disclaimer: The author of this idea has a position in this security and may trade in and out of this position without informing the Value Investors Club community.  The author makes no representation or warranty as to the accuracy of the data and estimates used in this analysis.

Catalyst

Potential synergies include:
1)  Buyside and sellside working through the deal docs and understanding pro forma cap structure
2)  The company will report FYE 3/2011 earnings in June and host a conference call, which should drive investor understanding of the hard synergies available from the deal
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