Kongsberg Automotive 2014 investment headwind, but technology wins Q4 and 2014 results Automobiles & parts Kongsberg Automotive s (KA) results showed an accelerated investment headwind in Q4 which, while not unexpected, held back EBIT below our forecasts. Revenue was in line, although early December shutdowns at certain customers also affected margins in the group s Fluid Transfer division. Despite this, the group continued to generate strong cash flow allowing further debt reduction, with gearing down to 2.2x net debt: EBITDA. While market conditions deteriorated towards year end, the group s investment in R&D, which reached 6% of sales, has yielded substantial orders for new technology areas such as AMT and Shift-by- Wire. This drove a record order intake of 282m of annualised revenues, although this is unlikely to show through for around two years. Year end Revenue ( m) PBT* ( m) EPS* ( ) 12/13 991 38.0 0.08 0.00 8.6 N/A 12/14 979 43.1 0.07 0.00 9.9 N/A 12/15e 982 51.7 0.10 0.00 6.9 N/A 12/16e 1,011 64.7 0.12 0.00 5.8 N/A Note: *PBT and EPS are normalised (fd), excluding intangible amortisation, exceptional items, net unrealised currency effects and share-based payments. DPS ( ) 2014 results affected by investment, but progress 2014 was fundamentally a year of progress where the group achieved revenue in line with guidance at 979m. However, EBIT came in c 13% below our FY14 forecast primarily due to a higher than expected increase in R&D as developments for customer winter trials were accelerated in Q4. Fluid Transfer margins were also affected as certain customers took earlier December shutdowns. Despite this, group margins were 20bp higher at 5.6% (FY13: 5.4%). Reported PBT was 19m with lower underlying finance charges offset by 24m of unrealised currency effects. Operating cash flow of 86m allowed a reduction in debt with net debt: EBITDA down to 2.2x (FY13: 2.5x) trending towards the group s 2015 2.0x target. 2015/16 forecasts reflect market and investment We have adjusted our 2015 and 2016 forecasts to reflect the current uncertainty regarding the market environment, particularly in Europe, but also moderation in Chinese light vehicles and volatility in Chinese commercial vehicles. In addition, we have included further investment in R&D in our forecasts, particularly in Driver Controls as the acceleration towards Automated Manual Transmissions (AMT) gather pace. KA will focus on operational efficiency improvements to offset this where possible and maintains its target 13% ROCE in 2015 (2014:11.8%). P/E Yield Price Market cap 20 February 2015 NOK5.79 NOK2,336m 0.12/NOK Net debt ( m) at 31 December 2014 218.1 Shares in issue 403.4m Free float 93% Code Primary exchange Secondary exchange Share price performance KOA OSLO N/A % 1m 3m 12m Abs (5.4) (11.1) (0.3) Rel (local) (8.3) (11.9) (6.1) 52-week high/low NOK7.7 NOK5.0 Business description Kongsberg Automotive is a global manufacturer of interior components (30% 2014 sales), driveline systems (26%), driver controls (19%) and fluid transfer products (25%), supplying the automotive and commercial vehicle markets. Next event Q1 results 16 April 2015 Analyst Roger Johnston +44 (0)20 3077 5722 industrials@edisongroup.com Edison profile page Valuation: Re-rating opportunity remains KA sits at 37-68% FY15e discounts to the larger peer group. While Q4 results were below our forecasts, we feel there were encouraging signs of the investment being undertaken translating to new contract wins that should support margin-enhancing growth over the next two to three years. Improved returns and a resumption of growth should act as a catalyst to potential re-rating. Kongsberg Automotive is a research client of Edison Investment Research Limited
Results show progress, but affected by investment KA s 2014 results were in line at the top level, but undershot in terms of profitability. Revenue decreased by 1.2% to 979m (2013: 991m), primarily driven by the end of certain production programmes and significant weakness in the South American commercial vehicle and European markets. Operating profit (EBIT) increased by 3% to 54.8m (2013: 53.2m) with margins increasing by 20bp to 5.6% (2013:5.4%). Divisionally, performance remained mixed, but showed underlying improvement: Interior. The Interior division increased revenues by 5.5m (1.8%) in 2014 to 304.5m. This was despite lower sales in the European business reflecting timing on production between a specific platform ending and ramping up, lower tooling and R&D revenue, which were partially offset by increased Chinese automotive sales. EBIT for the full year increased by 2.8m (12%) to 25.9m, with margins increasing by 80bp to 8.5%, despite an increase in development and sales activities in Q4. Q4 saw significant wins in Interior including the supply of pneumatic seat comfort systems to two premium European OEMs across a total of 19 different vehicles with lifetime contract values of > 250m over nine years. Driveline. Driveline revenues decreased by 5.3% over 2014 to 265.0m as a result of a number of programmes reaching the end of production and the weakness in the European business, in particular France. While EBIT dipped into a loss in Q4 due to a shortfall on revenues, increase in fixed costs related to marketing and higher D&A on a discontinued customer contract, full year EBIT increased by 2.1m (97%) to 4.5m. This was driven by a core focus on efficiency and fixed cost control undertaken throughout the rest of 2014. Operating margns therefore rose by 90bp to 1.7% (2013: 0.8%), highlighting that there is still a long way to go to get margins up towards group levels. Driver Control. The Driver Control division held revenues relatively flat, down just 4.4m or 1.7% to 252.7m despite an 11.1m currency headwind with stronger North American sales offsetting weakness in both Europe and South America, as well as a faster than expected shift from manual to automatic transmissions. EBIT for the full year decreased by 3.9m (-17%) due to the substantial increase in R&D investment, the majority of which was focused on the Driver Control division. This was exemplified by a 3m increase in development and sales activities to support growth opportunities in Q4 alone. While certain markets remain challenged, such as Brazil and European commercial vehicles, successes were achieved in Q4 with new business wins exceeding 64m annually out of 101.2m for the year as a whole, highlighting that while the increased costs are being felt, there are signs that it is paying off in winning future business. Encouragingly, there were significant wins in the newly designed AMT and shift by wire areas with a total value of 349m. Fluid Transfer. The Fluid Transfer division increased revenues by 4.5m or 2.4% for FY14 to 193.5m, generating a consistent level of revenues each quarter throughout the year at around 48m per quarter. FY14 EBIT increased marginally by 0.9m to 23.6m, despite a drop in Q4 caused by volume and mix effects, specifically in commercial vehicle markets, along with new plant start-up costs to increase manufacturing capacity in Europe. The volume and mix effects are expected to be temporary. Group net financial items were - 35.9m (2013: - 40.4m) affected by a substantial unrealised currency effect of - 20.6m (2013: - 19.7m). Underlying net interest costs decreased by 3.5m to 11.7m (2013: 15.2m). As a result, reported PBT increased by 48% to 19.0m (2013: 12.8m), although net profit decreased to 5.5m (2013: 6.6m) as tax effectively doubled to 13.5m (2013: 6.2m) as a result of losses not capitalised and a higher tax rate. Our financial analysis and Kongsberg Automotive 20 February 2015 2
Exhibit 1: Updated Edison forecasts FY14e forecasts now strip out the unrealised currency and other net financial effects to provide a consistent underlying year-on-year comparison. The group generated strong operating cash flow of 86.1m (2013: 87.6m), which allowed further pay down of debt with net debt decreasing to 218.1m (2013: 241.2m) after having invested 36.1m in property, plant and equipment, and intangibles, up 6.6m from 2013 as the group invested in certain capacity expansion projects most notably in the UK, a new technical centre in Sweden and certain product rationalisation. Overall net debt:ebitda decreased to 2.2x (2013: 2.5x) showing progress towards the stated target of 2.0x in 2015 and 1.5x beyond. 2015 and 2016 forecasts reflect market and margin dynamics Exhibit 1 below shows the 2014 results compared to our previous forecasts, as well as our updated 2015 and 2016 forecasts. 2014 was in line at the revenue level, but EBIT came in 13% beneath our forecasts, predominantly due to the accelerated increase in R&D investment in Q4, half of which affected Driver Controls, with the remainder spread evenly across the remaining divisions. With market dynamics softening and uncertainty increasing towards the end of 2014, we have eased our FY15 and FY16 forecasts to provide a more conservative view: Europe. Light vehicle market expected to remain flat with UK and Germany positive, but total production down due to the Russia/Ukrainian impact and weaker economies. Commercial vehicle market expected to exhibit modest growth. North America. Growth expected to continue across both light vehicle and commercial vehicle markets driven by low fuel prices and continued economic growth. Asia. Mixed market in China with light vehicle production continuing to grow, albeit slower, while commercial vehicle markets remain uncertain due to removal of government incentives. In addition, we have adjusted our forecasts to include a higher R&D spend in light of the Q4 rates and ongoing focus on growth investment with the largest impact being in Driver Controls: FY14 actual Change FY15e old FY15e new Change FY16e old FY16e new Change Revenue Interior 299 304 1.8 308 310 0.8 320 320 (0.1) Driveline 266 265 (0.4) 258 257 (0.4) 260 260 (0.1) Fluid Transfer 193 194 0.3 199 199 0.2 210 211 0.6 Driver Controls 257 253 (1.6) 257 253 (1.6) 265 260 (1.7) Elimination & Other (35) (37) 4.6 (38) (38) 0.0 (40) (40) 0.0 Group 980 979 (0.1) 984 982 (0.2) 1,016 1011 (0.5) EBIT Interior 26.6 25.9 (2.6) 28.4 27.2 (4.4) 30.4 29.4 (3.4) Driveline 5.4 4.5 (16.7) 6.3 6.2 (1.5) 10.3 10.3 (0.3) Fluid Transfer 24.5 23.6 (3.7) 25.8 24.8 (4.0) 28.4 27.3 (3.8) Driver Controls 22.7 18.6 (18.1) 22.9 19.1 (16.7) 23.9 20.7 (13.2) Unallocated (16.5) (17.8) 7.9 (16.0) (16.5) 3.1 (16.0) (16.0) 0.0 Group 62.8 54.8 (12.7) 67.4 60.7 (9.9) 77.1 71.7 (7.0) Underlying Net Interest (16.0) (11.7) (26.9) (9.0) (9.0) 0.0 (7.0) (7.0) 0.0 Normalised PBT 46.8 43.1 (7.9) 58.4 51.7 (11.4) 70.1 64.7 (7.7) Unrealised currency effects/other 0.0 (24.1) n/a 0.0 0.0 N/A 0.0 0.0 n/a PBT 46.8 19.0 (9.4) 58.4 51.7 (11.4) 70.1 64.7 (7.7) Tax (15.0) (13.5) (10.0) (14.8) (13.2) (10.8) (17.8) (16.5) (7.3) Net Profit (normalised) 31.8 29.6 (6.9) 43.6 38.5 (11.6) 52.3 48.2 (7.8) Net Profit (reported) 31.8 5.5 (82.7) 43.6 38.5 (11.6) 52.3 48.2 (7.8) EPS (normalised) 0.08 0.07 (7.9) 0.11 0.10 (13.2) 0.13 0.12 (8.0) EPS (reported) 0.08 0.01 (82.9) 0.11 0.10 (13.2) 0.13 0.12 (8.0) Source: Edison Investment Research Kongsberg Automotive 20 February 2015 3
Valuation KA remains at significant discount to peers Kongsberg Automotive remains at a significant discount to the sector of between 37-68% across FY15e P/E, EV/Sales and EV/EBITDA metrics. Exhibit 2 below shows the updated peer ratings, rolled forward to include 2015 and 2016 comparators: Exhibit 2: Relative peer valuation table Price (local ccy) Mkt cap ( m) P/E EV/Sales EV/EBITDA EBITDA margin EV/EBIT EBIT margin FCF yield 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 Bearings/seals SKF (SWE) 204 9,307 15.6 13.6 1.4 1.4 9.7 8.6 14.6 15.9 12.2 10.5 11.7 13.0 5.1 7.1 NSK (JP) 1534 6,258 12.4 11.8 1.0 1.0 7.3 7.0 13.6 13.6 10.3 10.6 9.6 9.1 9.4 10.4 NTN (JP) 557 2,195 11.0 10.3 0.8 0.8 6.4 6.3 12.1 12.1 12.0 12.5 6.5 6.1 8.9 10.3 Average 13.0 11.9 1.1 1.0 7.8 7.3 13.4 13.9 11.5 11.2 9.2 9.4 7.8 9.2 Driveline/powertrain/ electronics Continental (GER) 210 41,971 15.1 13.9 1.3 1.2 8.0 7.5 15.8 15.9 11.2 10.5 11.3 11.4 3.9 5.8 Denso (JP) 5550 36,304 14.3 12.9 0.9 0.9 6.5 6.0 14.5 14.8 10.0 9.0 9.4 10.0 4.6 5.3 BorgWarner (US) 61 12,067 17.2 14.5 1.6 1.5 9.5 8.4 17.3 17.4 12.3 10.7 13.4 13.7 3.7 4.8 GKN (UK) 382 8,523 13.4 12.3 0.9 0.9 7.5 6.9 12.2 12.7 10.7 9.7 8.7 9.1 5.2 5.9 Valeo (FRA) 133 10,565 15.1 13.1 0.8 0.7 6.5 5.9 11.9 12.1 10.8 9.4 7.2 7.6 3.5 4.2 TRW (US) 104 10,507 12.7 11.5 0.7 0.7 6.4 6.0 10.9 11.1 8.7 8.3 8.0 8.0 4.6 5.7 Brembo (ITA) 33 2,198 16.1 14.8 1.3 1.2 8.5 7.8 15.1 15.4 13.4 12.1 9.6 9.9 4.1 5.2 Average 14.8 13.3 1.1 1.0 7.6 6.9 14.0 14.2 11.0 9.9 9.7 10.0 4.2 5.3 Interiors Johnson Controls 49 28,255 13.5 11.9 0.9 0.9 9.3 8.8 9.8 10.8 12.5 11.6 7.3 8.1 4.7 5.7 (US) Autoliv (SWE) 112 8,944 17.3 14.7 8.8 8.2 8.6 7.7 12.8 13.2 11.7 10.4 9.4 9.8 3.6 4.2 Lear (US) 108 7,436 11.3 9.9 0.5 0.5 5.8 5.3 8.3 8.5 7.6 7.0 6.3 6.5 7.8 8.2 Faurecia (FRA) 39 4,894 14.2 11.1 0.3 0.3 4.5 3.9 6.9 7.4 7.6 6.5 4.0 4.5 4.9 7.6 Average 14.1 11.9 2.6 2.5 7.0 6.4 9.4 10.0 9.9 8.9 6.8 7.3 5.3 6.4 Total peer average 14.0 12.4 1.6 1.5 7.5 6.9 12.3 12.7 10.8 10.0 8.6 8.9 5.8 7.0 Kongsberg Automotive (NOR) 5.9 284 7.4 5.9 0.5 0.5 4.7 4.3 10.8 11.7 8.3 7.0 6.2 7.1 7.2 6.7 Source: Bloomberg, Edison Investment Research. Note: Priced as at 18 February 2015. The record order intake in 2014 provides some confidence that KA should begin to see the benefits of its investment strategy over the next two to three years. As these contracts begin to show through in results, we forecast that organic growth can recommence and that the combination of enhanced volumes and higher-margin contracts should drive improving returns. Management is targeting a 3-5% organic growth rate beyond 2015. We believe that as this happens, the discount to peers should narrow. Kongsberg Automotive 20 February 2015 4
Exhibit 2: Financial summary m 2012 2013 2014 2015e 2016e Year end 31 December IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 1,001.0 990.9 979.1 981.6 1,011.1 Cost of Sales (748.7) (722.5) (704.0) (710.0) (730.0) Gross Profit 252.3 268.4 275.1 271.6 281.1 EBITDA 77.0 97.1 96.9 106.0 118.0 Operating Profit (before amort. and except.) 30.7 53.2 54.8 60.7 71.7 Intangible Amortisation 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 Operating Profit 30.7 53.2 54.8 60.7 71.7 Net Interest (18.8) (15.2) (11.7) (9.0) (7.0) Unrealised FX gains/(losses) & other 0.1 (25.2) (24.1) 0.0 0.0 Profit Before Tax (norm) 11.9 38.0 43.1 51.7 64.7 Profit Before Tax (FRS 3) 12.0 12.8 19.0 51.7 64.7 Tax (6.7) (6.2) (13.5) (13.2) (16.5) Profit After Tax (norm) 5.7 31.8 29.6 38.5 48.2 Profit After Tax (FRS 3) 5.3 6.6 5.5 38.5 48.2 Average Number of Shares Outstanding (m) 399.7 399.8 401.8 403.4 403.4 EPS - normalised (c) 1.43 7.95 7.37 9.55 11.95 EPS - normalised and fully diluted (c) 1.43 7.95 7.37 9.55 11.95 EPS - (IFRS) (c) 1.33 1.65 1.37 9.55 11.95 Dividend per share ( ) 0.00 0.00 0.00 0.00 0.00 Gross Margin 25.2 27.1 28.1 27.7 27.8 EBITDA Margin 7.7 9.8 9.9 10.8 11.7 Operating Margin (before GW and except.) 3.1 5.4 5.6 6.2 7.1 BALANCE SHEET Fixed Assets 419.4 384.4 386.6 367.3 348.1 Intangible Assets 232.9 214.5 214.7 188.1 161.5 Tangible Assets 131.1 122.0 128.3 135.6 143.0 Investments 55.4 47.9 43.6 43.6 43.6 Current Assets 325.5 302.8 302.7 311.7 327.7 Stocks 78.8 77.3 76.8 81.8 91.8 Debtors 171.4 168.4 172.4 176.4 182.4 Cash 75.3 57.1 53.5 53.5 53.5 Other 0.0 0.0 0.0 0.0 0.0 Current Liabilities (208.3) (193.1) (189.8) (203.0) (219.5) Creditors (164.9) (167.8) (171.0) (184.2) (200.7) Short term borrowings (43.4) (25.3) (18.8) (18.8) (18.8) Long Term Liabilities (351.9) (304.5) (289.1) (249.3) (206.8) Long term borrowings (321.2) (273.0) (252.8) (213.0) (170.5) Other long term liabilities (30.7) (31.5) (36.3) (36.3) (36.3) Net Assets 184.7 189.6 210.4 226.6 249.5 CASH FLOW Operating Cash Flow 78.9 87.6 86.1 89.0 91.0 Net Interest (16.7) (15.9) (12.8) (10.0) (8.0) Tax 0.0 0.0 0.0 0.0 0.0 Capex (30.0) (29.3) (36.0) (39.3) (40.4) Acquisitions/disposals (2.4) 0.0 (0.4) 0.0 0.0 Financing 0.0 0.2 1.9 0.0 0.0 Dividends (0.9) 1.4 0.2 0.0 0.0 Net Cash Flow 28.9 44.0 39.0 39.8 42.6 Opening net debt/(cash) 315.8 289.3 241.2 218.1 178.3 HP finance leases initiated 0.0 0.0 0.0 0.0 0.0 Other (2.4) 4.1 (15.9) 0.0 (0.0) Closing net debt/(cash) 289.3 241.2 218.1 178.3 135.8 Source: Kongsberg Automotive accounts, Edison Investment Research Kongsberg Automotive 20 February 2015 5
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Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0)69 78 8076 960 Kongsberg Schumannstrasse 34b Automotive 20 280 February High Holborn 2015 245 Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St 6 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10167, New York US Sydney +61 (0)2 9258 1161 88 Phillip St, Sydney NSW 2000, Australia Wellington +64 (0)48 948 555 Wellington 6011 New Zealand