|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|
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Upside Potential: 30%+
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.
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|
|Revenue Mix by Region|
|Revenue Mix by Product|
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.
|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|
|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|
|W/C Source of Cash (3)||-||-||-|
|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
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.
|Sources and 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|
|Cash to Other Unsecured Claims||83.4|
|Other fees and expenses||80.5|
|Source: Disclosure Statement, Company filings and conversations with financial advisors.|
|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|
|Core Visteon 2011 EBITDA||331.7||331.7||331.7|
|Core Visteon Value||1,160.8||1,243.7||1,326.7|
|Current mkt price/sh (KRW)||KRW18000|
|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|
|Potential Upside from Current Levels:|
|2011 EPS (KRW)||KRW1700||KRW1750||KRW1800|
|Value of JV Interest in Yanfeng|
|50% Share of Net 2010 Income||92.2||92.2||92.2|
|Value of 50% JV Interest||737.5||829.7||921.9|
|Value of Interest in Other JV's|
|50% Share of Net Income||26.2||26.2||26.2|
|Value of 50% JV Interest||130.8||143.8||156.9|
|Source: Bloomberg, Company filings and proprietary estimates.|
|(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.|
|Source: Company filings and proprietary estimates.|
|Other JV Interests|
Auto Supplier Comps
|Shares||Market||Minority||Net||Net Debt /|
|American Axle & Manufacturing||AXL||$8.48||71.4||605||242||1,013||0||0||771||1,377||2.4x|
|Dana Holding Corporation||DAN||$10.23||140.4||1,437||1,059||939||771||98||(120)||2,186||(0.2x)|
|TRW Automotive Holdings Corp.||TRW||$36.86||119.6||4,410||767||2,044||0||148||1,277||5,835||0.9x|
|Revenue||EBITDA||EBITDA Margin||TEV / EBITDA|
|American Axle & Manufacturing||$2,184||$2,370||$319||$352||14.6%||14.8%||4.3x||3.9x|
|Dana Holding Corporation||$6,035||$7,004||$535||$680||8.9%||9.7%||4.1x||3.2x|
|TRW Automotive Holdings Corp.||$13,511||$14,302||$1,474||$1,561||10.9%||10.9%||4.0x||3.7x|
|1. Visteon TEV also includes $830mm of enterprise value from Yanfeng and $144mm of enterprise value from other JV interests|
|Source: Bloomberg consensus estimates|
|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|
|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|
|Source: 2010 and 2011 P/E Multiples from Bloomberg|
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