Description

Overview

Visteon has been written up several times in the past few years on VIC and the stock has performed well.  Recent divestitures, acquisitions, capital deployment actions and valuation continue to point to a compelling risk reward situation.

Today, VC is an auto supplier with 100% ownership of Visteon Electronics and a 70% ownership of publicly held Halla Visteon (climate control).  Since coming on in late 2012, the CEO has led an impressive array of value enhancing initiatives - non-core assets have been shed and mgmt is now aggressively deploying capital in share repurchases and accretive acquisitions.  There is the strong likelihood for further levels of capital deployment at both divisions, ownership/structure changes (most likely a tax free spin) and potential for a VC takeout - all while creating the core Visteon Electronics business at compelling multiples (1.9x 2014 EBITDA and 0.2x 2016 EBITDA using current Halla Visteon market prices).

Climate

Halla Visteon is publicly traded in Korea (018880-SE) and VC owns a 70% stake.  Halla is the clear #2 global climate player with a 13% market share and 2013 sales of $4.9B.  Sales by product are comprised of HVAC Systems (42% of sales), Powertrain/EV Cooling (27% of sales), Compressors (21% of sales) and Fluid Transport (10% of sales); by geography are 57% AP, 24% EU, 17% NA and 2% SA and by customer are 51% Hyundai, 24% Ford and 25% Other. 

Mgmt has guided to a 7.0% sales CAGR between 2014 and 2017 and 12% plus EBITDA margins (implies ~9.0% EBIT margins) supported by a solid net new backlog of business ($680MM).  The historical revenue, EBITDA and FCF performance has been very impressive.  The balance sheet is clean with a small net cash position and mgmt is starting to execute on small tuck-in acquisitions.  There is a 1.9% dividend yield already but the CEO of VC said on the Q1 call “fully expect that we're going to need to address the balance sheet at HVCC in one form or another, as it's under-levered…So I think, at this point, just from a sheer workload and focus perspective and just from a management perspective, let's get us through this JCI consolidation and then we can start talking more about HVCC later in the year.”

Electronics

Visteon Electronics recently acquired JCI’s electronics division.  Post the JCI acquisition and its previous consolidation of Yanfeng Electronics, Visteon Electronics has $3.0B+ in sales.  Post the JCI acquisition, Visteon Electronics will be the #3 player in cockpit electronics (10% market share), #2 player in driver information (22% market share) and #2 player in instrument clusters (19% market share).  Sales by product are comprised of Instrument Clusters and Displays (55% of sales), Audio and Infotainment (26% of sales), Vehicle Electronics (13% of sales) and Controls (6% of sales); by geography are 37% EU, 31% NA, 29% AP and 3% SA and by customer are 35% Ford, 11% Nissan/Renault, 8% BMW, 7% Honda, 5% GM and 34% Other. 

Mgmt has guided to total revenue of $3.8B by 2017 and 10% plus EBITDA margins supported by a solid net new backlog of business ~ $220MM (this excludes JCI’s backlog which is additive). 

Recent Events

Mgmt has continued to execute on their strategic plan to simplify the business and optimize the capital structure.

• Yanfeng Visteon was sold and most of the proceeds were realized in Q4 ($1.2B).
• Throughout the first half of 2014, mgmt announced a series of transactions to divest the majority of its Interiors segment and the unit will be completely gone by year end. 
• In January 2014, Visteon Electronics announced the $265MM acquisition of JCI Electronics which closed in early July.  Mgmt noted $1.3B in sales, $58MM of EBITDA (a 4.5% margin) and guided to $40MM of synergies by 2017.  During the Q2 call, Visteon guided to synergies of $40MM-$70MM. 
• In early May, Visteon announced a $500M accelerated stock buyback with $375MM remaining available under their current authorization.
• In early May, mgmt refinanced expensive debt with a new/cheaper commitment.
• In early June, Halla Visteon announced a $46MM acquisition of Cooper-Standard’s thermal and emissions product line which closed in Q3 and will add $100MM in sales.
• In mid-June, The VC Board extended the President and CEO’s contract from December 31, 2015 to December 31, 2017.  Tim Leuliette is currently 64 years old.
• In July, Visteon agreed to purchase a group annuity contract settling approximately 1/3 of its US pension liability, entirely funded by plan assets. 

Thesis

There is meaningful upside to the VC stock price…

• Halla Stake Monetization – most likely a tax free spin
  • Visteon owns 70% of Halla Visteon today and there is a strong likelihood that the stake will be reduced in the next two years.  Mgmt has said that a 100%, 51% or 0% stake are the three options but that either 51% or 0% makes the most sense.  A couple years ago, Visteon tried to buy 100% of Halla Visteon but weren’t successful due to local Korean ownership.  There was a point in time that mgmt thought the stake may have to rise to 80% for a period of time for tax optimization but now mgmt believes that other tax free structures can be realized without increasing ownership levels.  The CEO recently said in a sell side sponsored mgmt meeting that he’d like to “finish the job before I go home” when discussing simplifying the structure. 
  • A tax free spin seems like the most value-enhancing option due to some tax leakage with the other options.  Given the make-up of their VC shareholder base (there are restrictions on some investors holding foreign securities), mgmt believes there are reasonable solutions around this (either a backstop or ADRs). 
  • There is the potential for Halla Visteon to be sold as several industry analysts believe HMG Mobis (the auto supply group of Hyundai) or Mando could eventually buy the division.
  • Some industry analysts believe there is the potential for Halla Visteon to buy VC – I’m more skeptical on this path.
  • Visteon could get acquired as there has been a stepped up pace of consolidation in the space and VC is mentioned as an attractive takeout candidate.
• Halla Visteon margin opportunity
  • The Visteon climate business was contributed to Halla Visteon in Q1 of 2013 and had margins well below Halla.  Halla Visteon believes those margins will be improved (and they have to date).  Halla pre-integration was an 8-9% EBIT margin business and fell to the 7% level when Visteon’s climate business was contributed.  There are significant synergies across joint procurement and streamlining production processes that management is realizing to drive margins higher and eventually approach/exceed 8.0%. 
  • Mgmt is targeting 12% EBITDA margins (implies roughly 9.0% EBIT margins) by 2017.
• European market recovery / regulatory opportunity
  • Halla Visteon has 24% of sales in the European market while Visteon Electronics has 37% of sales.  The European market has been recovering slowly in 2014.
  • Strict fuel economy standards and emissions-related regs will drive the Halla Visteon business going forward as the segment is particularly well positioned in Europe.  None of the R744 refrigerant systems which many German OEMs are supporting are in the backlog yet and only Denso and Halla Visteon have a full system capability here (a $500MM total opportunity that could be implemented within 3-4 years).
• More capital deployment
  • There is the potential for a greater and faster buyback pace than whats been advertised to date
  • Initiation of a dividend is likely in 2015/2016
  • Further dividend increases are likely at Halla Visteon
  • Tuck-in acquisitions will happen at both segments
    • Halla Visteon has a clean balance sheet and is targeting acquisitions – surprisingly, the climate space is still decently fragmented while Visteon Electronics has a clean balance sheet and is also targeting tuck-in acquisitions.
• Attractive Valuation
• Taking the current market cap of publicly traded Halla Visteon implies a 1.9x EBITDA multiple on 2014 and a 0.2x 2016 EBITDA multiple for Visteon’s Electronics business (note that the current Halla Visteon stock price implies an 8.3x 2016 EBITDA multiple for Halla Visteon off my below consensus estimates).  Halla Visteon’s premium valuation is justified as there is above industry growth supported by a growing and strong net new backlog, a shareholder friendly mgmt team deploying capital, takeout potential and margin opportunity (fwiw, Halla Visteon stock currently trades in-line with the average sell side price target across 16 analysts).  Even assuming lower stock prices/multiples for Halla Visteon yields compelling upside to VC’s stock.   
• Visteon Electronics has the potential to warrant a premium valuation multiple... My 2016 SOTP valuation doesn’t contemplate any further acquisitions, divestitures or any incremental buybacks (beyond the $375MM) which could happen with any sell down in the Halla Visteon stake or taking on some leverage.  Further, my estimates are slightly lower than mgmt guidance (though I think their guidance is more than reasonable) and I assume a lower multiple for Halla Visteon than where it currently trades. 
• At the end of 2016, I conservatively use a 6.0x LTM EBITDA multiple on Electronics.  I use an 8.0x EBITDA multiple on Halla Visteon (note that it currently trades at 10.0x 2014 EBITDA, 9.3x 2015 and 8.3x 2016 my below consensus estimates)
• Harman trades at 14.3x LTM EBITDA/11.5x FYE June 2015 EBITDA and is considered a decent comp to Visteon Electronics
• The US auto supplier universe trades at 8.2x LTM EBITDA, 7.7x 2014 EBITDA and 6.8x 2015 EBITDA and the long term average is 5.5x NTM EBITDA but I would argue the industry is in a much healthier position than its ever been.
• The European auto supplier universe trades at 7.1x LTM EBITDA, 6.7x 2014 EBITDA and 5.9x 2015 EBITDA. 
• The Korean auto supplier universe + Denso (a Japanese comp) trades at ~6.5x 2014 EBITDA and 6.1x 2015 EBITDA (note the dividend yield for Halla Visteon is significantly higher than Korean peers and it has the least exposure to HMG).
• These assumptions equate to a SOTP value in 2016 of $140 but I think its reasonable to see upside that is materially higher as every multiple turn on Electronics is worth ~$7/VC share and on Halla Visteon is worth ~$10.50/VC share.

This posting is solely for the evaluation of club members and is not a recommendation to buy or sell this stock. The views expressed are those of the author individually and should not be attributed to any affiliated investment firm, which may or may not hold positions consistent with the views expressed herein and may buy or sell shares at any time.

Catalyst

• Further capital deployment at VC and/or Halla Visteon
• Potential spin, sale or reduction in VC’s Halla Visteon stake
• VC Takeout