Headquartered in Van Buren Township, Michigan, Visteon Corporation (VC) ("Visteon") is a global automotive parts company originally spun-off from Ford Motor Company in 2000. The Company is a tier 1 supplier of climate, electronics and interior systems, modules and components to automotive OEMs including Hyundai/Kia (~33% of sales), Ford (~31% of sales), BMW, Chrysler, Daimler, General Motors, Honda, Nissan, PS Peugeot, Toyota and Volkswagen. Visteon operates three business segments and a 50% non-consolidated partnership.
Halla Visteon Climate Control ("HVCC") (HCC, KS:018880) (~62% of total 2012 sales), a publicly traded company on the Korea Stock Exchange, is the world's second largest supplier of automotive climate systems and components. Visteon owns a 70% consolidated stake in HVCC. The segment has 33 manufacturing sites supported by five global technical centers in 18 countries and employs approximately 11,000 people. HVCC is one of only two "full-line" suppliers, meaning switching costs for customers are high, a competitive advantage for HVCC. This is because HVCC gives their customers the ability to reduce costs by purchasing a variety of HVCC products at once; thus, making the cost per unit lower than if the customer was to individually purchase the parts from multiple suppliers. 1st half '13 consolidated sales and EBITDA have grown 19% and 36%, respectively vs. 1st half '12. Management anticipates this segment will grow sales at a CAGR of 7%+.
Visteon Electronics (~18% of total 2012 sales) is a global provider of electronic components and systems for the vehicle cockpit, including audio and infotainment systems, instrument clusters, displays, climate controls and decorative control panels. The segment is the #3 producer of driver information and controls in the world. Visteon Electronics utilizes 16 manufacturing plants, four global technical centers and 11 regional customer centers with nearly 5,000 employees. Management anticipates this segment will grow sales at a 12%+ CAGR, outpacing vehicle production growth, by taking advantage of significant market growth in a fragmented market. 1st half '13 sales and EBITDA have grown 14% and 12%, respectively vs. 1st half '12.
Visteon Interiors (~20% of total 2012 sales) is a global provider of vehicle cockpit modules, instrument panels, consoles and door trim modules. Management makes divesting Visteon Interiors a priority, stating the segment does not fit the Company's long-term value objectives. Revenue and EBITDA has consistently been declining since 2011.
Yanfeng Visteon Automotive Trim Systems Co. ("YFV") is a 50% owned and non-consolidated China-based partnership between Visteon and Huayu Automotive Systems Co., Ltd.
Recent Operating Overview
Despite a weak European economy, Visteon, as a whole, delivered a strong 1st half '13 performance, generating an EBITDA of $357mm, up $67mm from the 1st half '12, as well as increasing sales by 10%. Gross and operating margins improved 130 and 120 basis points, respectively in Q2 FY13, resulting from fundamental improvements in operations.
Visteon's Story: From Bankruptcy to Restructuring
Weak economic conditions attributed to the global credit crisis caused Visteon to file voluntary petitions to reorganize under Chapter 11 bankruptcy in 2009. The Company completed its organization and emerged from Chapter 11 in October 2010. Recently, Visteon has sped up its restructuring efforts by divesting underperforming assets and allocating significant amounts of capital towards cost cutting initiatives. The market's opinion concerning Visteon's restructuring is evident in the Company's >50% YTD share price appreciation. Despite the rally, the stock is still valued at a discount to its intrinsic value.
I believe the mispricing is attributed to four factors:
- YTD rally makes the stock appear expensive.
- Deterring investors: The sour taste created by a company who emerged from bankruptcy.
- General lack of in-depth analysis and information due to the Company's small market cap size.
- Visteon screens at 6.36x TTM EBITDA, giving it the initial appearance of a fully valued OEM manufacturer, causing many investors to immediately turn their heads.
After doing some due diligence, I have concluded that Visteon trades at a discount to intrinsic value based on several components:
- Benefiting from cost reduction initiatives, HVCC and Visteon Electronics' EBITDA and operating margins will materially improve by 2016. Meanwhile Visteon Interiors' EBITDA will decline slower than the rate its sales will decline. Visteon's recent track record of operational improvements indicates a good chance of the program's success.
- Visteon's continued restructuring will create tremendous value for its shareholders, underestimated by the market. Divestiture of YFV and its affiliates, as well as the acquisition of YFV-Electronics ("YFV"), will benefit Visteon and its shareholders in multiple ways: large cash proceeds that will be returned to shareholders by 2015, simplify a relatively complex business, added operational focus towards two core businesses, and lessen exposure to the risks associated with the weak European economy.
- Visteon's three segments and non-consolidated partnership, each with independent business fundamentals and growth prospects, make the Company difficult to value as a whole. By analyzing and valuing each segment, the sum-of-the-parts are greater than the enterprise value.
Cost Reduction Plan
In November 2012, the Company announced a $100mm restructuring program designed to reduce fixed costs and improve operational efficiency by addressing certain underperforming operations and administrative costs. Management indicates the key drivers of savings include IT and engineer-related cost savings, elimination of redundant costs between HVCC and Visteon, and Elimination of support costs incurred by Visteon related to YFV. The Company ultimately hopes to reduce fixed costs and SG&A by 13-22% from current levels by 2015.
Management's track record of consistent improvements in manufacturing efficiencies supports the likelihood of a successful cost reduction program. Administrative and manufacturing efficiencies accounted for a $16mm and $101mm reduction in SG&A and operating expenses, respectively in 2011. Manufacturing efficiencies accounted for a $125mm reduction in operating expenses in 2012.
Efficiencies will expand HVCC and Visteon Electronics' EBITDA and operating margins, while preventing Visteon Interiors' EBITDA from declining at the rate its sales have declined.
Background of the Divestiture and an Initial Catalyst for a Potential Idea
The Company signed a definitive agreement back in August 2013 to sell its 50% non-consolidated stake in YFV (excluding YFVE), as well as its direct interests in other related interiors joint ventures to longtime business partner HASCO. Visteon will also increase its ownership stake in YFVE to $300mm. The transaction will contribute $1.1 billion in after-tax net cash proceeds, equivalent to 31% of Visteon's current enterprise value.
This implies the Company's remaining three remaining segments are valued at approximately $2.6bn. Visteon's TTM EBITDA excluding YFV, adjusted to include YFVE, is approximately $624mm, meaning the Company's three non-YFV segments are valued at only 4.2x TTM EBITDA, considerably beneath relevant industry peers who trade around 6.0x TTM EBITDA, despite Visteon Electronics and HVCC's attractive growth prospects.
Value Creation from Divestiture
The divestitures will create value for Visteon shareholders in the following ways:
- Large cash proceeds returned to shareholders via share repurchase program.
- Simplifying the dynamics of Visteon for both the Company's management and financial analysts.
- Acquisition of YFVE makes Electronics segment less exposed to the weak European economy, as well as making growth expectations tangible.
Returning Capital to Shareholders: Capital received from the YFV divestiture will create shareholder value through share repurchases. Following the announcement of the divestiture, Visteon's Board of Directors increased its share repurchasing program from $250mm to $1.0bn over the next two years.
Simplified Business: While Visteon isn't exactly a multi-national conglomerate, it is a multi-national business containing many subsidiaries and affiliates who produce an array of different product lines, all in various stages of the product life cycle. The complexity of Visteon's business stems from YFV's five channels: YFV Interiors (the core of YFV's business), Seating, Electronics, Safety, and Exteriors. By simplifying Visteon's corporate infrastructure from nine to three businesses, management can direct more operational focus towards the Company's two growth segments and further strengthen their efforts to divest the remainder of Visteon Interiors. On an external basis, less moving parts will attract additional investors and analysts who feel more comfortable with assigning a value to three, as opposed to nine, business segments.
Less EU Exposure and Tangible Growth Prospects: As part of the YFV-transaction, Visteon will increase its stake in YFVE by $68mm to gain a controlling interest and integrate the previous joint venture into a consolidated business. Consolidation yields two benefits. Because YFVE's global footprint is primarily in Asian markets, Visteon Electronics' sales to the Asian Pacific region will increase from 21% to 37% after the transaction. At the same time, sales to the European region will decrease from 38% to 30%. By increasing its exposure into Asian markets, Visteon lessens the adverse effects (poor consumer demand, currency related issues) created by the slump in the European auto industry. Less exposure to European markets also makes management's expected 12% sales growth rate achievable. Electronics sales decreased 8.5%, or $117mm, from YE '11 to YE '12. This figure is not a representation of the future. A $47mm decline in volume was attributed to economic conditions in Europe, partially offset by higher production volumes in North America and Asia. Product sales decreased $54mm as a result of unfavorable currency related to the Euro and Rupee. By increasing its global footprint in a favorable Asian market, Visteon Electronics can position itself to take advantage of the positive economic tailwinds prevailing in Asia, while creating an effective hedge against mediocre sales in Europe.
Given the multiple moving parts Visteon comprises of, each with different prospects and fundamentals, a sum-of-the-parts valuation is the most appropriate method for determining the intrinsic value of the Company.
The Company's enterprise value in the status quo is $3.7bn (My calculation provided below).
$3.90bn + $0.129bn Short-term debt + $0.67bn Long-term Debt - $0.983bn Cash = $3.7bn EV
Value of YFV: Visteon's 50% stake in YFV will be sold to HASCO for $1.1bn net cash.
Value of HVCC: HVCC is 70% owned by Visteon and is traded on the Korea Stock Exchange. The shares last traded on 10/21/13 at ₩39,350 South Korea Won, equivalent to about $37.00 USD per share (at the current exchange rate). At 106.76mm shares outstanding, the market capitalization for HVCC is about $3.950bn, making Visteon's stake equivalent to $2.765bn or 75% of Visteon's enterprise value.
Value of Visteon Electronics and YFVE: According to a 2009 report published by Deloitte on M&A activity in the automotive sector, OEM suppliers were acquired at 3-4x EBITDA during the Great Recession and 6-7x EBITDA in more robust markets. A 6-7x TTM EBITDA multiple for Visteon Electronics and YFVE is well deserved given three factors:
- 12%+ expected revenue growth rate achieved through consolidation and synergy of Visteon Electronics and YFVE.
- An automotive market that is weaker in some regions (Europe) of the globe than others (Asia and North America) As a result of the YFVE transaction, Visteon Electronics will lessen its exposure to Europe, while simultaneously increasing its exposure to the Asian Pacific, a region with favorable macro-tailwinds.
- The most relevant multiple, 7.5x 2012 EBITDA, implies a 6-7x multiple slightly undervalues the business. 7.5x is the multiple YFVE is valued at. Visteon's stake in YFVE will be valued at approximately $300mm after the YFV-transaction. Divide $300mm by YFVE's 2012 EBITDA of $40mm (adjusted accordingly to account for Visteon's new ownership percent of YFVE post-transaction) and 7.5x is the result.
At 6-7x TTM EBITDA, the segment would be valued at $924-1,078mm. Note: My calculation includes Visteon Electronics TTM EBITDA of $114mm (excluding equity in affiliates and NCI) plus YFVE's 2012 Adjusted EBITDA of $40mm.
Value of Remaining Visteon Interior: I will assign a multiple of 4.5x EBITDA to Visteon Interiors to properly account for Visteon Interior's lackluster performance and prospects. Assigning a 4.5x EBITDA multiple to Visteon Interior's '12 EBITDA implies the remainder of the segment is valued at $180mm.
Value (in millions):
Value Per Share
Market Cap./Per Share Price
Q3 earnings call set for 11/07/13: Most transactions for the YFV deal are expected to close late 2013/early 2014. Given the deal contains multiple transactions, if some transactions closed before the next earnings call, there will be a significant increase in the Company's cash balance. This will lower enterprise value, making the Company appear cheaper.
Returning capital to shareholders: The Board of Directors increased the share buyback program to $1bn over the next two years, up from $250mm at the start of the year.
Completion of YFV Divestiture: Following its completion in 2014, Visteon will be left with a large cash balance (thus a different EV) and a simpler business, prompting the market to revalue the fundamentals.
Catalyst for Long-Term Value Creation:
Divesting Remaining Interiors Business: Divesting the entire Visteon Interiors segment remains a priority for management. Upon completion, margins will improve dramatically, as well as revenue growth prospects.
- Margins: By divesting its entire Interiors business, Visteon will eliminate a segment with razor thin EBITDA margins. Excluding equity income, Visteon Interiors' 2012 EBITDA margins equaled 2.9%, materially beneath HVCC and Visteon Electronics' EBITDA margins of 10.0% and 8.6%, respectively. After the divestiture, expect EBITDA margins to improve around 130 basis points.
- Revenue: Growth HVCC and Visteon Electronics exhibited 19% and 14% revenue growth, respectively in 1st half '13 vs. 1st half '12. Despite the two segments displaying strong YoY revenue growth, the entire company's sales from continuing operations only grew by 10%, dragged down by the 12.6% decrease in Visteon Interior's 1st half '13 sales vs. 1st half '12. This is not a new occurrence. In 2012, Visteon Interiors' revenue from continuing operations declined 18% YoY. Following Visteon Interiors' divestiture, the dynamics of Visteon will once again alter. As the only two segments, HVCC and Visteon Electronics' revenue growth and expectations will no longer be overlooked. Visteon, with only its two core segments, will begin reporting positive YoY revenue and EBITDA growth, causing another price correction to reflect the change in expectations.
I recommend investors take a long position in Visteon. Despite the YTD rally, the Company is still undervalued by at least >32% based on the sum-of-the-parts valuation. The Company's 70% stake in HVCC and cash proceeds from the YFV divestiture equate to roughly the Company's current enterprise value. Visteon Electronics and Visteon Interiors are essentially free to the investor going long on the stock at the current market price. An investor will also receive a management team with a solid track record of creating shareholder value and returning capital to shareholders.