RBC Analyst: Linamar Should Go Private

Ten bucks is a pretty cheap price to pay for a share of Canadian auto parts maker Linamar Corp. (LIMAF.PK), says RBC Capital Markets analyst Nick Morton. So cheap in fact, that he says the company might be better off private.

In a note published Wednesday, Mr. Morton wrote:

Clearly, the share price performance of Linamar has disappointed and it may be that at this point, being public has few advantages.

He says the value of Linamar is considerably greater than its current C$10.20 share price and that in five years, when the automotive and construction market cycles may have recovered, the company’s stock could trade considerably higher.

Mr. Morton said:

We could see Linamar being a [leveraged buyout]. One scenario could be that the Hasenfratz family, which founded the company, pulls the trigger on a management buyout using their current 27% stake as equity and borrow the balance. Alternatively, the family could team up with a private equity firm and structure the buyout so the family maintains its stake and enjoys the upside.

We note that Linamar has only one class of shares and that its management has a good track record.

So what could the returns be if the company was taken private and then taken public again after five years? Based on a hypothetical takeover price of C$15 per share, the analyst estimates the compound annual growth rate could be anywhere from 24% to 34% depending on how much Linamar rides a recovery in the auto market.

So what are they waiting for? Mr. Morton rates Linamar “outperform” with above average risk. His 12-month target on the shares is C$19.