Monday December 1st 2014, is the first trading day for VA Automotive. Under the ticker AUTO (ISIN SE0006426508), the share will be listed on Sweden’s First North exchange. Sweden is known for its strong capital goods sector, so we decided to take a look at the newest addition.
In its current structure founded in 2008, VA Automotive is a company group that operates mainly within the vehicle industry (around 95% of group sales are related to the automotive sector). The group, which is a result of intensive M&A in recent years, focuses on three strategically important business areas: tool engineering, automation and components/systems solutions. VA Automotive operates in three locations in Sweden and two in China.
In each of VA Automotive´s three business areas, each company operates either independently or together with the other companies in the respective business area, depending on the customer´s needs and preferences. VA Automotive is also able to deliver a longer chain of competencies by collaborating across business areas, in order to achieve greater overall efficiency and shorter lead times.
The business area Tool & Die (ca 55% of group sales) comprises the companies VA international, Ningbo Modern Tools in China, and SwePart Verktyg, Lidhs Verktyg and PR ToolDesign in Sweden. Tools has high-tech infrastructure for tool engineering and manufacturing. Modern tooling is a process that is integrated into, and often concurrent with, the production development phase.
Within the business area Automation (ca 10% of group sales), via the company IndustriTeknik, various kinds of automation equipment are designed and manufactured. The company also provides service in the form of maintenance and refurbishment of production equipment.
Established in 1958, Läreda Mekan has a longstanding heritage as a manufacturer of vehicle components (ca 35% of group sales). With expertise and flexibility, this company produces complex sheet metal structures. Operations include metalworking, welding, coating and assembly. The company´s biggest-selling product is seat frames for the vehicle industry. Läreda Mekan also offers concept and product development services.
VA Automotive has already today an illustrative customer list, however, the majority of its business is generated from the Swedish automotive heavy weights Volvo PV (accounting for around 65% of expected 2014 sales), Volvo Trucks and Scania.
The European vehicle market is still characterized by a production rate which is below the pre-crisis demand levels in 2008. VA Automotive estimates the needed increase in production to be around 20% above today’s rate. In the US, production capacity has reached its maximum level and companies like Volkswagen have announced large investment (USD 7bn) to further increase their capacity there. A very important driving force for the years to come are the new model programs of the car manufacturers. The number of different models is increasing and the time of development is decreasing. This leads to strong growth of the market for VA Automotive’s products and services. In the past, the time frame from start to volume top in the car industry was around 5 years, today’s it has come down to 2 years. The increased number of car models has lead to a dramatic increase of need for tools. We see it as a very positive sign that VA Automotive states that its customers have flagged for massive need for tools and components for the years to come.
- SEK 700m in sales by 2017 (versus SEK 345m in 2013)
- Continue to grow both organically and through M&A
- Increase global presence
- Ambition to become a lightweight champion within products and development of sheet metal components
- Establishment of long-term partnerships with businesses where VA Automotive can add capacity and knowledge
As a result of the high M&A pace and associated restructuring costs, VA Automotive’s Pre-IPO balance sheet has room for improvement. Net debt (LT debt + ST debt to credit institutions – cash) at the end of Q3 2014 amounted to SEK 77,8m, which compares to equity of SEK 28,8m and total assets of SEK 190,7m.
Due to the fact that management sees large potential for market growth compared with today’s volumes, the company has decided to focus on continued growth for the coming years. As a first step, the intention is to establish new customers and markets in combination with the development of new products and services. The company has decided to go ahead with the IPO so it can use the proceeds to improve marketing and sales efforts and its customer oriented process- and product development. A meaningful part of the IPO proceeds will be used to improve the company’s balance sheet by amortizing short term loans with high interest rates. This will not only improve solidity but also the financial net as of 2015.
In order to get an insiders point of view, we sat down with VA Automotive’s COB Lars Thunberg for a Q&A session:
- Could you explain to our readers what makes VA Automotive unique and why they should consider to invest in your company?
[Lars Thunberg] I believe that the coming years will be good for automotive business. If we compare development in Europe with USA we will see a big change in automotive businesses in USA. There are almost not any free capacity in automotive business in USA, Volkswagen invests 7 billion USD in new plants to cover the new demand of cars. If we compare demand with supply in Europe we will see that the production is about 14.5 million sold cars. We believe that the demand is 16-17 Million cars and that this demand need to be field up. Accumulated demand from 2008 to today is approximately 20-30% per year over the supply! VA Automotive work with the whole supply change. We deliver tool & die automaton and automotive parts. VA Automotive is unique in its custom oriented offers, we offer one change in the production change or the whole concept where VA Automotive take responsible for product development to production (one stop-shop). all development today is about volume and new products, this two reasons push the development time closer. Some years ago there was a maximum volume per sold car after 5 years, today the maximum volume is somewhere between 18 months and two years from the start of selling. This creates a big demand in tool making. For example Volvo will invest 75 billion SEK in new models from now to 2022, this is a perfect situation for tool makers. Scania is also launching new models of the trucks, it was 19 years since this happened last time. This is good news for investors who want to become owners in a small company with high value products and production. In four years we have bought 4 companies and there will be more mergers in the future.
- Your goal is to more than double revenues compared to 2013 levels to SEK 700m by 2017. How much of this growth do you expect to be organically and how much will be related to M&A?
[Lars Thunberg] Right now we lose volume since old models in seating structures (VolvoXC90) is on its way out to end production. We have taken steps in offers and RFQ´s which will start increasing the sales in automotive components in the end of 2015. Sales in the automotive business goes in cycles which means that you follow the cars business life. We assume that sales to old customers will take us back in the sales of components to approximately 400 MSEK (Läreda Mekan), Lidhs and Swepart will increase its sales in tool & die to approximately 200 MSEK to 2017. Rest of the sales will be from Ningbo Modern Tool, VA Engineering and IndustriTeknik. Please understand that the increase to 700 million is whithout any new mergers, however, there are a lot of different discussions with companies who want to join the VA Automotive. There are different alternatives and we go through each alternative one by one before we act. VA Automotive could be a billon SEK company if we want, but VA Automotive will go for quality and businesses which can add value and where VA Automotive could develop the bought companies. We have an ambition to grow with acquisitions especially as we can pay a large part with new issues. More than 50 % will be organic growth.
- Which areas do you expect growth to come from primarily, both productwise and geographically?
[Lars Thunberg] First of all we will have a big growth in the tool and die segment, and then growth will be in the automotive components. This is normal because You always need tools to create components. What I can see today with forecast from Volvo Car and other European carmakers there will be a lot of activities during the coming years. Volvo Cars invest 75 billion SEK to 2022 in different models, this is totally unique, this has never happened before. If You are focusing on geographies, I believe that there will be a tremendous growth in India where VA Automotive have formed a joint venture. India Market is supposed to grow from 2010´s 2.5 million produced cars to 2025 when there will be 28 million cars produced. We don’t know when and how we will enter in to the India market, we can follow our customers or go to gather with a college. But we know that we will be there when time comes.
- Can you saying anything about the margins within your different business areas and what margin level for the group do you expect at revenues of around SEK 700m?
[Lars Thunberg] The margin is historical not big in the automotive business. There will be a change in the margin when the volumes come with the demand. VA Automotive will benefit from its own developed products. Today we are focusing on 3-5 % margin, but when the demand comes and our own products will be in the market we think that the market will increase to somewhere between 6-8 % margin.
- You have a strong standing with the Swedish car and truck manufacturers. Can you describe your efforts how to break into the German market? How do you see your chances to get meaningful orders from the Germans in the near future?
[Lars Thunberg] We have opened a reprehensive office in Germany which work with our customers on site in Germany. We believe in close relationship where representatives for VA Automotive in different countries and segments could work as door openers.
- Is there any aftermarket/service business for VA Automotive? If yes, how much of revenues is it?
[Lars Thunberg] Swepart and Lidhs have a lot of aftermarket/service, this because of the lack of people who can work with service. Today’s situation is critical for our customers where the demand can’t be handled. Revenues are higher in this services because lack of time and lack of workers.
- Can you say a few words around your manufacturing process? How much of the process is automated?
[Lars Thunberg] Today there is an automated process in selling components. However the tool and die segment is not automated and will not be because of the high end and specialist technic which is used to produce tools.
- Your intention was to raise SEK 22,5m plus an option to raise an addtional SEK 7,5m. Does the actual result of SEK 19,2m affect your plans somehow negatively?
[Lars Thunberg] We will work with slightly lower equity ratio and more debt.
- Did management participate in the IPO?
[Lars Thunberg] Some of the management participated, but I can’t say how much yet. Management owned already 63 % of the company before the listing.
- What are the biggest challenges you are facing right now?
[Lars Thunberg] The biggest challenge is to fill up Läreda Mekan production shortly during the first half year 2015. We are quite sure in our sales in 12-24 months from now. Of course it will be a challenge to the tool and die to meet up with the strong demand, if you sell to muck capacity before the market is filled up you lose bigger margin from customers who really need to buy in the later movement.
Valuation and conclusion
In 2013, VA Automotive reported revenues of SEK 345m, an EBIT of 3,7m and a net loss of SEK 5m. For the first 9-months of 2014, the company has reported revenues of SEK 261m (+6,5% y-o-y), an EBIT of SEK 10,7m (ca 4% EBIT margin) and a net profit of SEK 4,6m. If we extrapolate the 9-months growth in revenues for FY 2014, we get an estimated SEK 368m. Assuming a similar margin as for the first 9-months, this would imply an EBIT of SEK 14,8m. Assuming a comparable financial net and tax rate, we end up with an estimated FY 2014 net profit of around SEK 6,5m.
The IPO price was set at SEK 6,5 and VA Automotive managed to raise SEK 19,2m (below its original intention of SEK 22,5m). The total number of share following the IPO amounts to 13 605 710. Assuming listing costs of around SEK 2,5m, we believe that VA Automotive will be able to strengthen its bank account with SEK 16,7m.
In order to get feeling for a fair share price level for VA Automotive, we have decided to look at other listed Swedish automotive suppliers. There some well-known names such as Autoliv, Haldex, Concentric and SKF and while they are larger in size and have a longer and more established track record than VA Automotive, we still believe that they give a good indication of what the stock market is willing to pay for that kind of exposure. In the table below you can find the current valuation of these names, including the respective multiples for VA Automotive, based on our estimates for the years 2014-2016:
As you can see in the table above, VA Automotive will be listed at a significant discount to its sector peers. On EV/Sales multiples the discount to the average sector multiple is around 74%, on EV/EBIT it is 30% and on PER it is 47%. Obviously the discount becomes larger the longer we look into the future given VA Automotive’s aggressive growth ambitions. As mentioned before, the company aims to more than double revenues compared to 2013 levels to SEK 700m by 2017 and as COB Thunberg indicates in our Q&A session, this could even be surpassed if a suitable merger target is found.
Using simple math and applying the average multiples for the Swedish automotive suppliers sectors to our estimates for VA Automotive, the fair share price range is between SEK 8,6 and up to SEK 44,9. As always, the truth probably lies somewhere in between. VA Automotive is an unknown player to the market and will have to proof itself before it can expect to get the same valuation multiples as the established and much larger players. If VA Automotive can deliver on its ambitious growth targets, the upside for the share price is enormous.
In our opinion, a fair share price level at current conditions should be around SEK 10, implying an upside of more than 50% compared with the IPO price. The VA Automotive stock offers a great amount of fantasy. The Swedish capital goods sector is supported by a weakening SEK, which makes it even more competitive on the international arena and the growth drivers for the automotive industry seems in place for the years to come.