Description

 Please note: Superior Industries (SUP) is a microcap stock with limited daily trading volume.  

Superior Industries International is one of the world’s largest suppliers of light-weight aluminum wheels.  We believe SUP shares offer a highly asymmetric skew at current levels, where the simple deleveraging of the balance sheet could result in substantial equity returns in calendar 2024.  Despite being on the cusp of record EBITDA and significant free cash flow generation, Superior Industries trades at depressed EV/EBITDA valuations of 4.4x 2023E EBITDA of $177.5 million (midpoint of management guidance) and just 3.8x our 2024 estimate of $204.5 million.  Based on our 2024 free cash flow estimate of $77 million, we estimate the stock trades at 1.2x free cash flow.  Using yearend ’24 projected net debt (including the maturity date value of the preferreds), we project a 21% unlevered FCF yield.

During calendar 2024, the company will benefit from two material free cash flow drivers: (1) the unwind of temporary investment in working capital ($35 million) for safety stock (to manage through the German factory shutdown) and $20 million of estimated cost reductions ($25 million on a pro forma full-year basis.)  

We believe Superior is positioned to generate close to $150 million of cumulative free cash flow during 2024/2025.  If the stock simply holds onto its current 4.5x 2023E EBITDA multiple (assuming modest organic EBITDA growth), the equity could appreciate by over 300% by the end of 2025.  

In practice, if we are right about the deleveraging that is ahead for Superior, multiple expansion is quite possible.  Just 0.5 turns of multiple expansion, would add another 100%+ in incremental upside to the above calculus.

The upcoming fourth quarter results should allow management to demonstrate progress on the balance sheet and set the stage for record EBITDA performance in 2024.  Full-year 2023 operating cash flow guidance of $80 to $95 million implies 4Q FCF of $46 million at the midpoint.  Looking forward, after giving effect to $30+ million of previously announced cost reductions (which should be fully implemented by March 31, 2024), we forecast 2024 EBITDA of $205 million, surpassing the prior EBITDA peak of $194.2 million in 2022. 

Summary Forecasts and Valuation

Source: company reports, our estimates; in millions of dollars

Superior’s Balance Sheet is Rapidly Deleveraging (in millions of dollars)

Company Description

Superior Industries International is one of the world’s largest suppliers of light-weight aluminum wheels. OEM wheels (sold for factory installation on new models) accounted for 94% of 2022 sales.  Vehicle brand customers include BMW, Ford, GM, Honda, Jaguar-Land Rover, Lucid Motors, Mazda, Mercedes-Benz Group, Nissan, PSA, Resnault, Stellantis, Subaru, Suzuki, Toyota, VW Group (Volkswagen, Audi, Porsche, Bentley, SEAT, Skoda.)  During the first nine months of 2023, the company’s largest four customers were GM, Ford, VW Group and Toyota which represented 20%, 16%, 15%, and 11% respectively, of sales.  During the nine months ending September 2023, North America accounted for 54% of value-added sales with the balance represented by Europe.  Value added sales represents net sales adjusted for the cost of aluminum, which is a passthrough.  

Adjusting for the shutdown of Superior’s German plant (see below), virtually 100% of the company’s manufacturing operations will be based in low-cost markets Poland and Mexico. 

Cost rationalization efforts – We estimate +$20 million to EBITDA in 2024 on a reported basis

During 2023, SUP management took two steps to rationalize the company’s cost structure.  The first was focused on reducing overhead costs across the company in both the US and Europe.  The company has indicated that it will meet its expense targets in the US while a small portion of Europe’s remaining overhead reductions slipped into 2024 (we estimate around $1 million.)  Management initiated the first of these cuts early in the year and, as such, a portion of the savings have already been captured.  We estimate $4 to $5 million of incremental savings in 2024.

Superior is expected to realize a further EUR20 million (US$21.6 million) of savings from the shutdown of its plant in Werdohl, Germany, impacting roughly 6% of production volume.  As a result of this shutdown, 800,000 wheels will now be manufactured at the company’s existing plant in Poland.  We assume full shutdown of the German plant will be effective March 31, 2024.  Accordingly, we estimate that about $15 to $16 million of savings from the plant shutdown will be captured in 2024.

Taken together, EBITDA should benefit by roughly $20 million on a reported basis and perhaps $25 million on a pro forma full year basis.       

Management.  

New management led by CEO Majdi Abulaban came in to clean up the arguably disastrous purchase of UNIWHEELS AG and have done an excellent of improving operations and significantly improving the balance sheet.

Source: Company reports, 2023 and 2024 represent our estimates. Dollars in millions. 

Mr. Abulaban joined the company in May 2019 after 34 years at Aptiv PLC (formerly Delphi).  In his last role at Aptiv, Mr. Abulaban served as SVP and Group President Global Signal and Power Solutions.  Mr Abulaban also serves on the board of SPX Flow.  

CFO Tim Trenary joined the company in September 2020.  Mr. Trenary previously held several CFO roles.  Most recently, he was employed as EVP and CFO at Commercial Vehicle Group where he worked from 2013-2020.

Why does this opportunity exist?  Ill-timed expensive acquisition of European operations 

Superior’s shares have been in the penalty box since the former management’s March 2017 acquisition of UNIWHEELS AG, expanding SUP’s operations into Europe.  The transaction took a debt-free balance sheet and saddled it with $740 million of debt and $150 million (150,000 shares) of redeemable preferred stock ($300 million at maturity) that was issued to TPG Growth.

As of September 30,2023, the balance sheet consisted of the following:

• $177 million in cash 

• $376.2 million in senior secured debt (term loan with Oak Tree), maturing 12/15/28, with a current cost of roughly 13%

• EUR217 million (US$229 million) in 6% senior unsecured notes due June 15, 2025

• $150 million of original stated amount preferred stock which is entitled to a 9% dividend and a full redemption payment of $300 million at maturity on September 14, 2025.  Redemption is subject to the company having sufficient funds to pay off all or a portion of the preferred stock.  

• $3 million in miscellaneous debt, 

Current management has made it clear that the company plans to repay, refinance or extend both the notes and the preferred stock prior to their 2025 maturity dates.  During the 3Q:23 conference call, CFO Trenary suggested that once financial results reflect the favorable benefit to EBITDA associated with the German factory shutdown (see above), the company will likely move forward with addressing the balance sheet.  

The debt and the preferred have been an overhang on the equity, particularly in the context of a rising interest rate environment.   

With net debt/EBITDA leverage declining rapidly, we believe the company is an excellent position to deal with notes in 2024 and decide what it wants to do with preferred.

Impressive Operating Story – Record EBITDA and substantial free cash flow expected in 2024

Management has done an impressive job of improving the quality and profitability of the business over the past 5 years.  While car industry volumes have been sluggish in the US and Europe and wheel shipments are down vs. pre-pandemic volumes, management has been consistently improving its mix of business from its OEM partners and eliminating unprofitable wheels.   As a result of management actions, the company is well positioned for record EBITDA and substantial free cash flow generation in 2024.

Content per wheel has grown 33% between 2019 and 2022.  This reflects increased OEM/consumer adoption of wheels that offer the following: higher performance/ lighter weight, larger size (i.e. SUVs), and premium finish.  Improving content per wheel has benefitted profitability.  

During this same period (2019-2022), EBITDA margins increased 300bps.  After set back in 2023, margins are poised for a step-function 300bp increase in 2024 to over 26% (reflecting the cost rationalization program).

Superior Industries: Summary Operating Data

Source: Company reports; our estimates

We forecast a material working capital swing of at least $25 million this year combined with a $26 million increase in EBITDA.  This suggests that free cash flow could easily increase by $50 million or more (to >$80 million) in 2024 (management guidance is $35 million for 2023).  We are modeling $77 million for 2024 estimated FCF.

Risks: Liquidity, Financial leverage, Deep recession

Catalyst

Fourth quarter results should demonstrate solid FCF generation

2024 Guidance could affirm SUP is on track for record EBITDA and strong FCF

Passage of time and further deleveraging

Refnancing of the balance sheet at some point in 2024 or early 2025