VISTEON CORP N/A W
September 09, 2010 - 8:47pm EST by
cablebeach
2010 2011
Price: 49.00 EPS NR NR
Shares Out. (in M): 54 P/E NR NR
Market Cap (in $M): 2,658 P/FCF NR NR
Net Debt (in $M): -157 EBIT 0 0
TEV ($): 2,047 TEV/EBIT NR NR

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Description

Base Case Target Price: $64.45/sh

Upside Potential: 30%+

Summary

The when issued shares of Visteon, trading in the $48-49 per share range, represent a very attractive opportunity with a base case target price of $64.45/sh based on 3.75x 2011 EBITDA of $675 million.  VSTN's plan of reorganization was confirmed on August 31 with an effective date before October 1.  Visteon, which had been under pressure as a result of the credit crises and global economic slowdown, elected to filed Ch. 11 in May 2009 to right size its capital structure (VSTN will emerge with zero net leverage and excess cash), change its operating footprint, streamline its business and improve operating performance.  Ch. 11 allowed the company to reject unprofitable contracts and exit undesirable businesses.  As a result, VSTN has been able to revamp itself.

Business Description

Visteon's operations are organized into three product groups: Climate, Electronics, and Interiors.  The Climate Product Group designs and manufactures fully integrated heating, ventilation, and air conditioning ("HVAC") systems, as well as powertrain cooling systems which provide cooling and thermal management for a vehicle's engine and transmission.  The Electronics Product Group produces a wide range of in-vehicle information and entertainment systems, as well as electronic climate controls, integrated control panels, powertrain and feature control modules, and lighting.  The Interiors Product Group produces a variety of cockpit modules, door panels, interior trim products, and console modules for storage.  Visteon is a market leader in each of its product groups.

Formerly Ford's captive automotive parts supplier which was spun out in 2000, VSTN has lowered its unit labor costs significantly, diversified its customer base and transformed itself from a low growth, mostly U.S. and Western European business with poor margins to a high growth company with two thirds of the enterprise value coming from its Asian operations.  Ford now represents less than 30% of total revenues and Hyundai is the second largest customer, representing 27% of total revenues.  We like this customer base since Hyundai continues to gain share globally and Ford is outperforming the other Big 3 OEM's.  We also like the fact that 30% of revenues come from its Asian operations which have been experiencing dramatic top line growth and margin expansion.

Visteon Customers   % Volume 
Ford  29%
Hyundai  27%
Nissan/Renault  9%
PSA Peugeot  7%
Chrysler  3%
GM  3%
Volkswagon  2%
Mazda  2%
Fiat  1%
Honda  1%
Other  16%
  100%
   
Revenue Mix by Region   
Europe  37%
North America  32%
Asia  27%
Other  4%
  100%
   
Revenue Mix by Product   
Electronics  31%
Climate  29%
Interiors  27%
Other  13%
  100%

Valuation

Because so much of the enterprise value comes from its 70% interest in Halla Climate control, a public company which trades on the Korean Stock Exchange, and Yanfeng Visteon, a Chinese joint venture, we think it is overly punitive to assign value on the basis of VSTN's consolidated results.  Accordingly, our valuation is based upon a sum-of-the-parts analysis.

Sum-of-the-Parts      
   Low  Mid High 
Multiple  3.50x 3.75x 4.00x
Visteon Core EV  1,160.8 1,243.7 1,326.7
70% Stake in Halla  1,122.1 1,122.1 1,122.1
50% Stake in Yanfeng  737.5 829.7 921.9
Other JV Interests  130.8 143.8 156.9
TEV  3,151.1 3,339.3 3,527.5
Exit Cash (1)  785.3 785.3 785.3
Less: Cash at Halla  (100.0) (100.0) (100.0)
Warrant Exercise Proceeds  114.2 114.2 114.2
NOL (2)                              -                                 -                             -  
W/C Source of Cash (3)                              -                                 -                             -  
Exit Debt  (500.0) (500.0) (500.0)
Other Debt  (143.0) (143.0) (143.0)
Equity Value  3,307.7 3,495.8 3,684.0
       
Shares Oustanding (MM)                       54.2    
Value per Share  $60.98 $64.45 $67.91

(1) See Sources & Uses

(2) Book Value of the NOL was $1.66bb as of 12/31/09

(3) There will be a material source of cash from restoration of trade terms

Source: Disclosure Statement, Company filings and financial advisors

 

The first step in our sum-of-the-parts analysis is to isolate the cash flow from Visteon's high growth Asian businesses from the rest of the company which we refer to as "Core Visteon".  We then apply a multiple range of 3.5x to 4.0x 2011 Core EBITDA to arrive at a value of between $1.2bn and $1.3bn for Core Visteon (the calculation of Core EBITDA is shown in the sum-of-the-parts breakdown below).

Second, we value Halla at its current market price, valuing VSTN's 70% interest at $1.1bn.  We think this is conservative as analysts have suggested it trades at a discount to peers because of the parent company bankruptcy taint.  We like the business because we like Hyundai which has consistently taken share from rivals.  Halla supplies 100% of Hyundai's export market for climate control and 70% of its domestic Korean market.

"Three reasons to buy Halla Climate Control.  First, as Hyundai-Kia Automotive Groups global growth is expected to continue, HCC's profit is anticipated to grow accordingly. The company acquired large stakes in competitive overseas plants from its majority shareholder, Visteon. As equities method gains from these subsidiaries contribute to earnings, we expect consolidated profit to improve going forward.  Second, normalization of delivery to existing overseas customers such as Ford/Mazda, and expansion of large scale foreign OEMs through the Chinese and European headquarters in the mid-to-long term. Third, profitability is likely to improve in the mid-to-long term. While operating profit at the parent is expected to display steady growth, its overseas subsidiaries are projected to have strong growth, boosting consolidated operating income and parent-base pretax income."

Source: Daewoo Securities research report dated May 4, 2010

Next is Yanfeng Visteon, VSTN's Chinese joint venture which we value at 8x to 10x VSTN's share of 2010 net income.  This is consistent with the way many sellside equity analysts look at GM's Chinese JVs though applied to 2011.  We think our valuation is conservative given estimated top line growth of over 60%.  Furthermore, we believe a range of 8x to 10x 2010 net income is also conservative given that comparable auto supplier companies trading on the Shanghai exchange currently trade at an average of 15.8x 2010 net income (see Yanfeng Auto Supplier Comps below).  Yanfeng is a serious business that produces automotive interior, exterior, seating, electronics and safety systems. The company has 70 production bases across China and overseas. It services more than 30 OEMs and exports to over 14 countries and areas in North America, Europe, Australia and South East Asia. Yanfeng was ranked #4 of top 100 automotive component enterprises in China.

The balance sheet cash number is derived from the sources and uses table below and the other JVs are valued at between 5.0x and 6.0x 2010 net income.

Additionally, Visteon had $1.66bb of NOLs as of December 31, 2009.  We expect Visteon to preserve in excess of $1bn in NOLs because the cancelation of debt income is limited, and we believe the bankruptcy exit was structured in such a way that the NOLs can and will be used to step up the basis in foreign subsidiaries.  We have not incorporated any value from the NOLs in our valuation to be conservative.  Similarly, we have not included any value from working capital releases as a result of restoration of trade terms to be conservative.

We prefer Visteon to other auto suppliers such as Delphi or Lear because we think there are more catalysts for Visteon.  The prepetition bondholders control Visteon's Board and are committed to unlocking value.  Management has also been incentivized to realize value for shareholders, even if that comes from a break-up of the company.  We believe management will be focused on strategic alternatives, possibly including a sale of select businesses to Johnson Controls ("JCI").  JCI already bid for Visteon's interiors and electronics businesses claiming those businesses were of great strategic importance.  More recently at a conference in Detroit, JCI management indicated that they were still highly interested in acquiring the Visteon assets and they were simply waiting for Visteon to emerge from bankruptcy in order to resume a dialogue.  We would not be surprised to see JCI produce a higher offer for select Visteon businesses.

Visteon trades at just 3.0x 2011 EV/EBITDA based on our $675mm of projected 2011 EBITDA and is the least expensive way to play the global auto supplier group.  The mean 2011 EV/EBITDA multiple is 4.6x using consensus estimates from Bloomberg.  Given Visteon's significant growth potential from its Asian businesses and given Visteon's higher EBITDA margins, we believe Visteon should trade at a minimum in-line with Lear.  Lear is currently trading at 3.5x 2011 EV/EBITDA using consensus estimates.  Our base case 2011 EV/EBITDA multiple of 3.75x for Visteon implies a when issued share price of $64.45 representing an increase of over 30% from current levels.

Trading of When Issued Shares

Shares of reorganized Visteon currently trade when issued (short for "when, as, and if issued") through the desks of several major banks.  When buying when issued shares, buyers are not required to put up any upfront capital because when issued transactions are on an "if" basis and are settled if and when the actual security is issued.  Because the company's plan of reorganization has been confirmed, we do not believe there is any process risk in owning the when issued shares.

Appendix
 

Sources and Uses            
             
Sources      Uses       
Equity rights offering                          1,250.0   Prepetition TL                                   1,659.1
Cash 6/30/10                          1,160.0   Cash on B/S at Exit                                        785.3
New TL Net Proceeds                              500.0   Administrative claims                                        105.0
Additional Cash Generated since 6/30                                  60.0   ABL Claims                                        127.2
Total Sources  2,970.0   DIP Facility                                           75.0
                            Priority Tax Claims                                              5.3
      Other Claims                                              5.4
      Cash to Other Unsecured Claims                                         83.4
      Backstop fees     3.50%                                      43.8
      Other fees and expenses                                         80.5
      Total Uses                                   2,970.0
             
Source: Disclosure Statement, Company filings and conversations with financial advisors.       

 

 Sum-of-the-Parts Breakdown         
         
 Core Visteon Value (Excluding Halla and JV's)       
         
 Consolidated 2011 EBITDA                                   675.0    
 Less: Yanfeng                                    (92.2)  Equity in net income 
 Less: Other JVs                                    (26.2)  Equity in net income 
 Add: Non Controlling Interest                                   100.0  Minority interest deduction 
 Less: 2011 Halla EBITDA                                 (325.0)    
 Core Visteon 2011 EBITDA                                   331.7    
         
         
                                             Core Visteon Value   
   Low   Mid   High   
 Core Visteon 2011 EBITDA                             331.7                                331.7                            331.7  
 Multiple  3.50x 3.75x 4.00x  
 Core Visteon Value                         1,160.8                            1,243.7                        1,326.7  
         
 Halla Valuation         
         
 Current mkt price/sh (KRW)    KRW18000    
 Shares outstanding                                   106.8    
 Market cap of equity (KRW)    KRW1,921,680.0    
 USD/KRW exhnge rate                               1,198.8    
 Market cap of equity (USD)                          1,603.0    
 Value of Visteon's 70% Stake in Halla                          1,122.1    
  2010 P/E  10.3x    
         
 Potential Upside from Current Levels:         
   Low   Mid   High   
 2011 EPS (KRW)  KRW1700 KRW1750 KRW1800  
 P/E Ratio  10.0x 11.0x 12.0x  
 Value/Sh  KRW17000 KRW19250 KRW21600  
         
         
 Value of JV Interest in Yanfeng         
         
   Low   Mid   High   
 50% Share of Net 2010 Income                                92.2                                   92.2                               92.2  
 P/E Multiple  8.0x 9.0x 10.0x  
 Value of 50% JV Interest                             737.5                                829.7                            921.9  
         
         
 Value of Interest in Other JV's         
         
   Low   Mid   High   
 50% Share of Net Income                                26.2                                   26.2                               26.2  
 P/E Multiple  5.0x 5.5x 6.0x  
 Value of 50% JV Interest                             130.8                                143.8                            156.9  
         
Source:  Bloomberg, Company filings and proprietary estimates.         

 

 Financial Projections

                       
                           
Visteon                            
                           
                           
  2007 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10E 4Q10E 2010E 2011E
Sales       11,275         9,544         1,352         1,569         1,733         2,031         6,685         1,904         1,945         1,661         1,758         7,268         7,553
Growth (yoy)  0.2% -15.4% -52.8% -46.1% -18.3% 22.9% -30.0% 40.8% 24.0% -4.2% -13.4% 8.7% 3.9%
Gross Profit(1)             573            459              45              80            116            356            597            418            104            148            154            824            665
% Margin  5.1% 4.8% 3.3% 5.1% 6.7% 17.5% 8.9% 22.0% 5.3% 8.9% 8.7% 11.3% 8.8%
Adjusted EBITDA(2)             413            329              15              73            125            234            447            161            166            141            147            615            675
% Margin  3.7% 3.4% 1.1% 4.7% 7.2% 11.5% 6.7% 8.5% 8.5% 8.5% 8.3% 8.5% 8.9%
                           
                           
(1)  The variability in Gross Margins in 4Q09, 1Q10, and 2Q10 was primarily attributable to a number of Pension/OPEB adjustments.
Excluding the impact of these adjustments would have resulted in Gross Margins of 7.9% in 4Q09, 8.9% in 1Q10, and 9.2% in 2Q10.    
(2) Adjusted EBITDA includes the difference between Equity in NI of non-consolidated affiliates and NI attributable to noncontrolling interests.
This is consistent with company reported EBITDA.  Adjusted EBITDA also excludes the impact of the Pension/OPEB adjustments and reversals made through bankruptcy.  
                           
Source:  Company filings and proprietary estimates.                     
                           
                           
Yanfeng                            
                           
                           
  2007 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10E 4Q10E 2010E  
Sales             929         1,059            270            349            394            439         1,452            526            595            625            656         2,402  
Growth (sequential)  43.8% 14.0% 29.3% 12.9% 11.4% 37.1% 19.8% 13.1% 5.0% 5.0% 65.4%  
Gross Profit             162            190              33              59              61              64            217              88              97              31              33            249  
% Margin  17.4% 17.9% 12.2% 16.9% 15.5% 14.6% 14.9% 16.7% 16.3% 16.3% 16.3% 10.4%  
Net Income               68              71              17              23              34              24              98              49              49              44              43            184  
% Margin  7.3% 6.7% 6.3% 6.6% 8.6% 5.5% 6.7% 9.3% 8.2% 7.0% 6.5% 7.7%  
                           
Source:  Company filings and proprietary estimates.                     
                           
                           
Other JV Interests                            
                           
                           
  2007 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10E 4Q10E 2010E  
Sales             707            805            122            161            203            225            711            220            233            233            233            919  
Growth (sequential)  9.4% 13.9% 32.0% 26.1% 10.8% -11.7% -2.2% 5.9% 0.0% 0.0% 29.3%  
Gross Profit             106            119              20              28              34              27            109              35              33              33              33            134  
% Margin  15.0% 14.8% 16.4% 17.4% 16.7% 12.0% 15.3% 15.9% 14.2% 14.2% 14.2% 14.6%  
Net Income               26              14               (4)              15              17              14              42                 8              21              12              12              52  
% Margin  3.7% 1.7% -3.3% 9.3% 8.4% 6.2% 5.9% 3.6% 9.0% 5.0% 5.0% 5.7%  

 

Auto Supplier Comps 
                     
                       
      Shares Market       Minority Net   Net Debt /
  Ticker Price Out Cap Cash Debt Preferred Interest Debt TEV 2010 EBITDA
                       
American Axle & Manufacturing AXL $8.48 71.4 605 242 1,013 0 0 771 1,377 2.4x
ArvinMeritor Inc. ARM $13.80 94.1 1,298 289 1,019 0 37 730 2,065 2.8x
Dana Holding Corporation DAN $10.23 140.4 1,437 1,059 939 771 98 (120) 2,186 (0.2x)
Federal-Mogul Corp. FDML $17.21 98.9 1,702 1,020 2,854 0 82 1,834 3,618 2.7x
Tenneco Inc. TEN $25.49 59.8 1,523 146 1,254 0 39 1,108 2,670 2.2x
Autoliv, Inc. ALV $57.80 88.5 5,114 459 878 0 4 419 5,537 0.4x
BorgWarner Inc. BWA $46.18 114.0 5,265 188 966 0 42 779 6,086 1.1x
Johnson Controls JCI $28.38 673.3 19,109 908 3,365 0 250 2,457 21,816 1.0x
TRW Automotive Holdings Corp. TRW $36.86 119.6 4,410 767 2,044 0 148 1,277 5,835 0.9x
Cooper-Standard COSH $36.00 18.4 662 189 473 129 2 284 1,077 1.3x
Lear Corp. LEA $72.95 49.5 3,609 1,420 721 132 108 (699) 3,149 (0.9x)
Visteon(1) VSTN $49.00 54.3 2,658 800 643 0 519 (157) 2,047 (0.3x)
                       
High                     2.8x
Mean                     1.1x
Median                     1.0x
Low                     (0.9x)
                       
                       
  Revenue EBITDA EBITDA Margin TEV / EBITDA      
  2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E      
                       
American Axle & Manufacturing $2,184 $2,370 $319 $352 14.6% 14.8% 4.3x 3.9x      
ArvinMeritor Inc. $4,650 $4,589 $256 $384 5.5% 8.4% 8.1x 5.4x      
Dana Holding Corporation $6,035 $7,004 $535 $680 8.9% 9.7% 4.1x 3.2x      
Federal-Mogul Corp. $6,070 $6,487 $671 $763 11.0% 11.8% 5.4x 4.7x      
Tenneco Inc. $5,556 $6,537 $510 $619 9.2% 9.5% 5.2x 4.3x      
Autoliv, Inc. $6,861 $7,359 $1,076 $1,107 15.7% 15.0% 5.1x 5.0x      
BorgWarner Inc. $5,291 $6,250 $737 $886 13.9% 14.2% 8.3x 6.9x      
Johnson Controls $33,654 $36,272 $2,473 $3,006 7.3% 8.3% 8.8x 7.3x      
TRW Automotive Holdings Corp. $13,511 $14,302 $1,474 $1,561 10.9% 10.9% 4.0x 3.7x      
Cooper-Standard $2,179 $2,288 $225 $240 10.3% 10.5% 4.8x 4.5x      
Lear Corp. $11,333 $12,901 $759 $909 6.7% 7.0% 4.2x 3.5x      
Visteon $7,382 $7,671 $584 $675 7.9% 8.8% 3.5x 3.0x      
                       
High         15.7% 15.0% 8.8x 7.3x      
Mean         10.2% 10.7% 5.5x 4.6x      
Median         9.8% 10.1% 5.0x 4.4x      
Low         5.5% 7.0% 3.5x 3.0x      
                       
1. Visteon TEV also includes $830mm of enterprise value from Yanfeng and $144mm of enterprise value from other JV interests    
Source: Bloomberg consensus estimates                  

  

Yanfeng Comps         
             
          2010 2011
Shanghai Exchange Comps     Ticker   P/E   P/E 
Fuyao Group Glass Industries     600660 CG  14.5x 12.4x
Changchun Faway Automobile Components   600742 CG  15.0x 13.2x
Shanghai Jiao Yun Co       600676 CG  16.7x 15.3x
Lingyun Industrial Corp       600480 CG  17.2x 14.9x
Average          15.8x 14.0x
             
          2010 2011
Japan & Hong Kong Exchange Comps     Ticker   P/E   P/E 
Aisin Seiki (Japan)       7259 JP  10.2x 9.0x
Calsonic Kansei (Japan)       7248 JP  12.6x 8.0x
Denso (Japan)       6902 JP  15.3x 12.6x
Keihin (Japan)       7251 JP  11.8x 9.4x
NHK Spring (Japan)       5991 JP  9.4x 8.5x
Toyoda Gosei (Japan)       7282 JP  11.7x 9.9x
WeiChai (Hong Kong)       2338 HK  10.0x 9.3x
Average          11.6x 9.5x
             
Source: 2010 and 2011 P/E Multiples from Bloomberg    

 

 

 

 

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