Visteon (VC) $73.00

Visteon has been written up before, but a lot has changed in the last year as the story has unfolded and it is a fundamentally different company now with an even better risk/reward in my opinion despite the rise in the share price.  Visteon is a surprisingly still an under followed and still misunderstood story.  I show 5 sell side analysts following it vs say LEA with 17 or BWA with 20.  By way of a quick background, VC emerged from bankruptcy in late 2010 with an interesting collection of assets but an unclear path for realizing shareholder value.  Most of the value of VC was buried in Asian ventures it did not fully control which made for a muddled story.  Previous management failed to come up with a strategy for realizing value and was not delivering on expected performance.  After a Board fight, a shareholder friendly board replaced prior management with Tim Leuliette as CEO.  Tim signed a contract through 2015 that had strong share price incentives – aligning his interests with shareholders and creating a time table for catalysts.  Tim laid out a plan and delivered on it.  Initially his focus was to create optionality around VC’s Asian interests such that he could credibly point to several paths to shareholder value and represent that he was not boxed in by his partners and in a weak bargaining position.  He then let the opportunities come to him.  The net of all this was that VC has announced a series of deals over the last 2 years that essentially has transformed the business into a highly attractive asset.

VC is no longer going to be an operating company for all intents and purposes.  It will be a holding company with about 20-30 employees in the US.  That holding company will hold 2 very attractive assets and a lot of cash.  Pro Forma for the deals, VC the holding company should have roughly $1265m in net cash or $26.00 per share.  VC also will basically own 2 very attractive operating assets.  First they own 70% of Halla Visteon which is now the number 2 player in automotive HVAC behind Denso.  This is a great asset that according to management should have at least 7-8% organic top line growth for the next several years and I think it might be closer to 9-10%.  EBITDA should grow in excess of that as incremental synergies are realized from merging Halla with VC’s climate business.  Halla is benefitting from both secular trends and very strong company positioning.  From a secular standpoint, management thinks the next several years will be among the best in the company’s history.  As the auto industry goes to small block engines, start/stop engines, hybrids and the like – the HVAC systems become significantly more complicated and more value added. It is easy to create cold air and heat from a big block engine that is always on and when emissions and efficiency are not top concerns.  We are entering a period where content per vehicle will grow significantly as emissions standards, efficiency concerns and more complicated engines go into effect.  In addition Halla is tied to two of the best horses – Ford and Hyundai-Kia which together are 75% of the rev.  This also gives Halla a lot of room to grow as its now global footprint and scale are helping them win business from the rest of the automotive world and management thinks Ford/Hyundai will be less that 65% of the revenue by 2016 as the other OEM’s begin to ramp.  In addition Halla generates strong fcf and has a pristine balance sheet.  Management intends to use Halla’s balance sheet to do acquisitions at the Halla level to continue to consolidate the industry and accrete value to VC shareholders. 

Halla is a publically traded company and so it is easy to see the real time value of VC’s Halla stake which today translates into $56.19 per VC share.  So if you take that plus the roughly $26.00 of pro forma net cash at the VC holding co level – that $82 of value or more than the share price today.  Take off $3-4 for a normalized corporate G&A structure of around $18m at 10x and get say $79 in net value today.  VC does have an underfunded pension I estimate currently of about $370m and an interiors business that they are going to divest in the very near term.  I am working on the assumption for simplicity’s sake that a combination of rising rates and whatever they get for interiors which is a marginal business for them offsets the pension.  You can refine this with more detail as there are some tax assets as well – but for talking purposes if you just net them at the moment you will not meaningfully be off.  That leaves you with the electronics business basically for free.

The electronics business was created from an undersized VC electronics business together with a majority interest VC bought in its Chinese electronics venture.  Together these make for an exciting asset.  Given secular trends around cockpit electronics in the car, there are tremendous growth opportunities as well as margin enhancement possibilities.  Electronics should do around $200 of fully consolidated EBITDA in 2014 as a newco and management thinks the top line should grow at least 12% organically the next several years with potential that it could be more as new products in the pipeline around consumer electronics begin to get sold.  EBITDA should grow in excess of that and the business generates very strong fcf as there is minimal cap ex. required for the growth.  I think a decent comp with somewhat similar growth would be HAR which trades at 10x forward EBITDA.  Again – you get this business for free.

Another way to look at this is that here we have a management team committed to realizing the value of the SOTP of all the assets.  With a massive buyback ready to begin early next year as management returns the $1 billion+ proceeds of the YF sale to the Chinese, they have the opportunity to retire shares at a significant discount to the intrinsic value of the assets while those assets are accreting value at a rapid clip.  The combined effect of the capital shrinkage with the strong growth of Halla and Electronics creates upside of over 100% in the next 2 years.