Forvia (formerly faurecia): How to explain the heavy plunge on the stock market of the auto parts manufacturer Forvia?

(BFM Bourse) – The action of the former Stellantis subsidiary plunged by more than 12.7% on Monday and fell again on Tuesday. The market seems to be questioning the quality of the results published by the company, especially its cash generation. But Stifel considers these fears excessive.

Automotive equipment manufacturers are known for their volatility on the stock market. But the descent into hell of the Forvia action is still cause for concern. The stock of the automotive equipment manufacturer born from the takeover of the German Hella by the French Faurecia in 2022 fell by 12.7% on Monday and lost another 11.8% this Tuesday at the start of the afternoon. Which brings its fall over two sessions to 23% for the moment.

If we except Atos (-69%), Forvia now shows the biggest drop in the SBF 120 over the whole of 2024 (-40%).

The group’s annual results published Monday morning did not include any major disappointments. The company even far exceeded expectations on its net cash flow, of 649 million euros. Noting that volumes in Europe are unlikely to increase over the next seven years, Forvia also announced a plan to adapt its industrial footprint on the continent, which should result in 10,000 job cuts (maximum) in five years. . This initiative was appreciated by analysts, given the overcapacity present in Europe in this sector.

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Moreover, Forvia shares opened sharply higher on Monday before completely turning around during the day. And yet, in the opinion of several experts, Monday’s conference call with management did not hold any unpleasant surprises.

So how can we explain the fall in the stock? It would seem, according to several analysts, that the market is asking questions about the quality of the results published by Forvia, in particular on cash generation.

Questions about cash generation

“The stock underperformed significantly as the market focused on working capital inflows which supported net cash flow in the second half and are expected to support cash generation significantly in 2024 and 2025 “, underlines Deutsche Bank.

Cash flow is a very particular point of attention for investors in Forvia stock. Quite simply because the group found itself in debt following the takeover of Hella, just before interest rates rose. For many analysts, Forvia’s deleveraging trajectory constitutes the main subject on the stock market. However, the higher the cash flow, the more cash the company generates and therefore reduces debt.

In 2023, Forvia therefore generated 649 million euros in net cash flow. The cash flow table published by the company shows that the group benefited from a positive change in working capital requirements (WCR*) of 659 million euros last year compared to 405 million in 2022. Hence the questions of the market highlighted by Deutsche Bank. Investors may fear that this improvement (i.e. decrease) in WCR hides a wolf that artificially inflates cash flow, even if absolutely nothing seems to indicate this as it stands.

The bank also points out the fact that the group has proposed paying a dividend, even if it is very limited, at only 50 cents per share. “The dividend should have sent an encouraging signal, but we think that keeping it at zero to allow for lower debt would have been a positive element of reassurance,” she says.

We also have the impression that the group is paying for having signaled the need to restructure its European activities. As if the market “punishes” the messenger…

An exaggerated dive?

However, is the drop in the share price exaggerated? Stifel asks the question in a note published this Tuesday morning. His one-word answer: yes. “The bearish arguments relayed to us refer to technical elements usual for Forvia,” notes the bank.

Regarding WCR, Stifel recognizes that the improvement is roughly equivalent to the amount of cash flow, and that its positive impact has significantly increased compared to 2022.

Except that this is the very objective of Forvia via its “manage by cash” plan intended to improve cash generation. Stifel thus argues that the variation in WCR is explained by “good reasons”, namely better inventory management, better collection of customer receivables, and synergies drawn from alignment with Hella’s practices in payments .

Incidentally, Stifel invites us to be constructive on the 2024 cash flow objective, with an amount expected at least at the same level as that of 2023 by Forvia. The research office emphasizes that WCR will benefit from lower inventories and that the target communicated by the company includes the negative impact of restructuring in Europe on cash (around 250 million euros).

Conclusion: “the share price overreaction yesterday (Monday) was mainly driven by market sentiment (…) Some investors will likely need reassurance on ongoing execution when the group publishes its first-year results semester in July: management knows that it must keep its promises and that there is no margin for error in 2024/25”, judges Stifel.

Questioned by BFM Bourse, Forvia for its part recalled that it does not comment on variations in its stock price.

Remember that working capital requirement (WCR) corresponds to the difference between customer receivables and inventories on the one hand and supplier debt on the other hand. To simplify, it measures the resources necessary for the group to finance its operations. The higher it is, the more it weighs on the generation of cash flow.

Julien Marion – ©2024 BFM Bourse

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