(BFM Bourse) – The Swiss bank has purchased the French automotive supplier, encouraged by the company’s restructuring plan and its cash flow generation potential.
The start of Forvia’s stock market year is painful. The automotive equipment manufacturer born from the takeover of the German Hella by the French Faurecia has fallen by 32.4% since January 1, one of the biggest drops in the SBF 120.
The share price fell by more than 12% and then by 9.7% during the two sessions following the announcement of the results of the company led by Patrick Koller. Despite a generally satisfactory publication, investors feared that the improvement in cash generation was hiding a wolf, even though there was nothing to indicate it. What had prompted the management organized a conference two days later to clarify the situation.
The group had also announced a major restructuring plan in Europe to adapt to low volumes on the Old Continent. This should result in the elimination of a maximum of 10,000 positions.
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An improbable breach of covenants
In a note published this Thursday, UBS writes that “the recent weakness in the stock is due to concerns about debt reduction, which could be compromised by the new restructuring plan.”
The Swiss bank does not share these fears. It raised its purchase advice on Forvia shares, compared to “neutral” previously, with a price target of 20 euros. Which also brings the title which increases by 4.3% around 5 p.m., signing the largest increase in the SBF 120.
For UBS, Forvia’s deleveraging trajectory is on the contrary under control. The group must respect a ratio of net debt to gross operating profit (Ebitda) of less than three to meet its commitments to its creditors, what is called a “covenant”.
UBS estimates that Forvia will reach a ratio of 1.8 at the end of 2024, after 2.1 at the end of 2023. And potentially at 1.5 including the asset sales planned by the company. Even in its “stress test” scenario, with an operating margin twice lower than the group’s objective (which intends to reach a rate of between 5.6% and 6.4% in 2024) and a cash flow in the red, the bank estimates that the group would remain below the limit of 3.
A restructuring with significant savings
UBS estimates on the contrary that Forvia should be able to generate a robust net cash flow of 850 million euros in 2024 (the company is targeting more than 650 million euros) thanks to better profitability and a favorable development in working capital requirements.
As for Forvia’s restructuring program, the bank would like to emphasize that it is “the largest restructuring program announced among spare parts suppliers” and “that it can be self-financed”.
Certainly, this plan should penalize Forvia’s results, subtracting 1 euro of profit per share this year according to its calculations, and its cash in 2024. But the “expected (net) savings are the most significant communicated by the automotive equipment manufacturers: 500 million euros per year by 2028, or around 30% of 2023 operating profit or around 1.9% of turnover with a positive impact of 2 euros on earnings per share”, argues UBS.
Ultimately, with the recent fall in the price, UBS judges that Forvia presents an “attractive risk-return ratio”.
Julien Marion – ©2024 BFM Bourse
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