RASSINI Market Outperformer 12M FWD Price Target P$49.0 Price 43.31 12M Price Range 28.8 / 39.4 Shares Outstanding 320 Market Cap (Mill) 13,865 Float 30.0% Net Debt (Mill) 1,867 EV (Mill) 16,345 Dividend Yield 2.4% 2015 12M 2016e 2017e Revenues 12,897 14,307 15,804 16,567 EBITDA 2,014 2,542 2,643 2,887 Net Profit 884 1,265 1,212 1,355 Free CF 1,007 1,234 24 430 EPS 2.8 4.0 3.8 4.2 P/E 15.7 11.0 11.4 10.2 EV/EBITDA 8.0 6.4 6.1 5.4 P/BV 3.7 3.0 2.7 2.2 Lilian Ochoa Guerra lochoa@gbm.com.mx +52(55) 5480 5800 ext. 4014 Héctor Vázquez Montoya hrvazquez@gbm.com.mx +52(55) 5480 5800 ext. 4528 RASSINI s growth potential still solid Today s results confirmed our optimism about RASSINI s story and its undeniable potential ahead. We believe the highlight of the report should be the ongoing market share gain and profitability improvements recorded in the NAFTA region, along with an outstanding FCF generation. We are presenting our 12M FWD price target of P$49.0 and reiterating our Market Outperformer recommendation, as RASSINI s fundamentals remain intact. After the adjustment of our estimates to reflect the sound volume increase aided by contracts won recently and capacity expansions in order to attract upcoming contracts. 2Q16 Highlights: Exceeding expectations. Positive top line (+25.3% YOY) due to a strong performance in the NAFTA region coupled with non-recurring revenues (~US$4.4 million during the quarter) and a strong USD appreciation. The latter was completely enough to offset the tough scenario of the Brazilian division. RASSINI s profitability continues to improve. Recently launched contracts with higher value added products and cost efficiencies had led to constant growth in profitability across the NAFTA division. In terms of consolidated figures, Operating and EBITDA margins expanded by 350 each, to 15.0 and 19.6%, in the same order. Outstanding bottom line amounted to P$351.3 million (+53.2% YOY) following the outstanding performance of the company s operating figures Despite higher CAPEX (+75.5% YOY), RASSINI showed outstanding FCF generation of around P$520.1 million thanks to the sound improvements in profitability. However, net debt increased 22.8% QOQ to P$1.8 billion due to the USD appreciation and a dividend payment of P$480.2 million. EV/EBITDA FWD 12M PRICE PERFORMANCE VS.IPC P/E 5.8 5.6 5.4 5.2 5.0 4.8 4.6 4.4 4.2 4.0 07/15 08/15 09/15 11/15 12/15 01/16 02/16 03/16 04/16 05/16 07/16 40% 30% 20% 10% 0% -10% -20% 07/15 08/15 10/15 11/15 01/16 02/16 04/16 05/16 06/16 18 17 16 15 14 13 12 11 10 9 8 07/15 08/15 09/15 10/15 11/15 12/15 02/16 03/16 04/16 05/16 06/16 RASSINI IPC
Estimates Variation 2016 2017 Previous New Previous New MXN YOY% MXN YOY% MXN YOY% MXN YOY% Revenues 15,804.4 22.5% 15,804.4 22.5% 15,959.0 1.0% 16,567.1 4.8% Operating Profit 1,950.7 34.7% 1,950.7 34.7% 2,171.5 11.3% 2,156.7 10.6% Op. Margin 12.3% 12.3% 13.6% 13.0% EBITDA 2,643.3 31.2% 2,643.3 31.2% 2,884.8 9.1% 2,887.4 9.2% EBITDA Margin 16.7% 16.7% 18.1% 17.4% Net Profit 1212.4 37.2% 1212.5 37.2% 11,403.3 840.6% 1,355.2 11.8% Net Margin 7.7% 7.7% 71.5% 8.2% FCF 984.0 503.8 1,337.0 1,035.8 *Figures in thosands of MXN After this quarter s good news, we are adjusting our estimates for 2H17 an onwards to better reflect the incremental volumes from the expansion of a second line in RASSINI s Puebla plant representing around 13% additional capacity to the total capacity. We believe this plant will bring higher value added operations to the company, as a result of better technology. The investment regarding the plant expansion is considered to be about US$ 13.0 million. Finally, we are incorporating an additional US$15 million to Capital Expenditures during 2016 due to new contracts specifications and requirements. Our RASSINI investment thesis remains intact based on a brighter operating outlook and an attractive valuation, supported by the following: RASSINI s good market position. The company is well positioned in the suspensions and brakes components market, leading in market share, with a strong client base and serving some of the biggest OEMs in the world. Positive outlook with the company s long-term contracts. RASSINI holds an efficient business model and strong cash flow generation, with long-term contracts, allowing the company to focus on cost efficiencies. A good NAFTA industry overview. We expect the industry to continue on the rise with a promising automotive outlook. Higher EBITDA margins than the industry. RASSINI has been able to post higher margins than the industry by holding an SPT (steel pass-through) agreement, enabling the company to have controlled COGS and focus on productivity. Attractive valuation, trading at 6.1x EV/EBITDA 16e vs. an industry average of 6.9x, implying a 11.6% discount against its global peers. We would like to highlight that RASSINI s operations will not be impacted much after Brexit as revenues coming from Europe represent less than 4.0%. Despite automotive sales and production growth have slowed in the last three months, a strong USD, coupled with new contracts with a better product mix, may continue to show benefits for the company in terms of sales and profitability. Hence, after the adjustment of our estimates, as well as our economic assumptions, we are updating our 12M FWD price target to P$49.0 and reiterating our Market Outperformer recommendation.
Estimates vs. Official Results GBM's Estimates Official Results Revenues 19.6% 25.3% Op. Profit 32.9% 64.1% EBITDA 28.3% 52.4% Net profit 36.5% 53.2% Op. Margin 12.7% 15.0% EBITDA Margin 17.3% 19.6% Net Margin 8.2% 8.8% Source: GBM with Bloomberg data Despite auto dealerships grew a bit quieter during the second quarter, US consumer demand for new cars continues to ease, nevertheless RASSINI continues with strong top line figures. The positive results came on the back of the ongoing efforts of the company of gaining market share mainly in the NAFTA light vehicle and heavy trucks market coupled with RASSINI s ability to mitigate pressures within the Brazilian market. Additionally, as USD continues strong, revenues will continue to benefit. As a result, top line rose 25.3% YOY. Breaking down each business division of the NAFTA region, we find the following: Leaf Springs (54.6% of NAFTA revenues). The positive momentum continues for the heavy trucks market, which has been translated into positive figures for this business division by showing higher volumes mainly coming from the NAFTA region leading revenues to increase by 36.3% in a YOY basis. Coil Springs (11.6% of NAFTA revenues). Recently investments in R&D are bearing fruit within the coil springs business division. The latter has been translated in a better product mix, leading revenues to show a 23.2% YOY hike. Brakes (33.8% of NAFTA revenues). The brakes division managed to increase by 25.1% YOY due to the sound volumes resulted from a higher market share. We should mention that during the quarter, AUDI-Q5 contract started production by adding marginal volumes to RASSINI s production Regarding Brazil, the scenario continues to be challenging (-24.1% YOY slowdown in revenues). Breaking down each business division of the Brazilian region, we see the following: Leaf Springs (85.6% of Brazil revenues) decreased 23.1% YOY. Coil Springs (14.4% of Brazil revenues) managed to advance by 9.1% YOY. Nevertheless, the company is taking action to mitigate the negative effect of the Brazilian division. Some this actions include: Reduction in payroll Transfer of NAFTA capacity to Brazilian plants The latter has led the company to reach its breakeven point (in terms of EBITDA) which we expect that this trend should maintain during the whole year.
RASSINI s revenue mix NAFTA revenue mix 2Q16 Brazil s revenue mix 2Q16 Brakes 33.8% Coil Springs 14.4% Coil Springs 11.6% Leaf Spring 54.6% Leaf Spring 85.6% Consolidated revenue mix by product Consolidated revenue mix by region 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 72.8% 15.7% 69.9% 14.9% 63.3% 14.5% 74.2% 14.3% 73.1% 14.9% 74.4% 15.9% 73.5% 15.5% 89.6% 18.5% 91.3% 19.0% 80.2% 78.7% 84.0% 85.6% 88.4% 92.0% 91.5% 91.4% 92.2% 28.0% 29.1% 31.5% 31.1% 31.2% 31.5% 30.7% 29.1% 31.2% 19.8% 21.3% 16.0% 14.4% 11.6% 8% 8% 9% 8% Leaf Spring Coil Springs Brakes NAFTA BRAZIL Breaking down by industry performance, we saw the following: Mexico There were more than 868 thousand cars produces in Mexico in 2Q16. This represents a 1.2% YOY decrease, but a 7.8% QOQ increase for car production. Just in June, there were produced more than 319 thousand cars, representing is the best record for car production in any month of June in Mexico s history. This improvement might have happened because of the opening of the KIA production plant in Nuevo León. Even though production is not at its best moment, sales continue growing. Mexico reports a 23.3% YOY increase for this quarter in car sales. Recently, AMDA raised its estimate of auto sales growth in the country by one hundred thousand units. Now, AMDA placed its forecast at 1.55 million vehicles, during 2016. This increase in sales is caused because of the ease of finding funding. Exports in this quarter show a decrease of 6.5% YOY. Despite the improvement of US demand; Canada, Germany, Colombia and other Latin American countries reduced their imports of cars produced in Mexico. North America US car production diminished 1.5% YOY in this quarter. Sales improved 11.5% in a quarterly basis, but the current level represent a 0.3% YOY reduction.
Automotive production reached its highest peak in the NAFTA region at the end of 2015. Car production in this region increased 3.0% in 1H16 in comparison with the same period of the previous year. There were produced 17.5 million vehicles in North America in 2015, and according to IHS it is expected that by the end of 2016 there will be produced 18.1 million vehicles Brazil Manufacturing stoppages, lack of auto parts, and the reduction of working hours have led to the contraction of automobile production. Brazil s car production for 2Q16 fell 15.2% YOY. Car sales shrank 22.1% in comparison with the second quarter of the previous year. Sales and production of vehicles have been affected in a very negative way because of the deep recession and the political crisis that Brazil is currently living. Automotive production by country Thousands of units Automotive sales by country Thousands of units 400,000 350,000 300,000 250,000 14,000 12,000 10,000 8,000 400,000 350,000 300,000 250,000 200,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 200,000 6,000 150,000 600,000 150,000 4,000 100,000 50,000 400,000 200,000 100,000 2,000 - - 06/11 09/11 12/11 03/12 06/12 09/12 12/12 03/13 06/13 09/13 12/13 03/14 06/14 09/14 12/14 03/15 06/15 09/15 12/15 03/16 06/16 09/11 12/11 03/12 06/12 09/12 12/12 03/13 06/13 09/13 12/13 03/14 06/14 09/14 12/14 03/15 06/15 09/15 12/15 03/16 06/16 MX Production BZ Production US Production (SAAR index) Source: GBM with Bloomberg data MX Sales (Left Axis) BZ Sales (Left Axis) US Sales Source: GBM with Bloomberg data Improves profitability is attributable to a better product mix. Despite sustained hardship in Brazil and delayed government projects, RASSINI s profitability continues to improve. We should mention that recently launched contracts with higher value added products and cost efficiencies had led to constant growth in profitability across the NAFTA division. In terms of consolidated figures, operating and EBITDA margins expanded by 350 each, to 15.0 and 19.6%, in the same order. EBITDA Breakdown by 2Q15 600 535 547 500 400 300 200 100 12 0 NAFTA Brazil Total 14% 12% 10% 8% 6% 4% 2% 0% EBITDA Breakdown by 2Q16 800 796 797 700 600 500 400 300 200 100 0 1 NAFTA Brazil Total 15% 10% 5% 0% -5% -10%
More good news for RASSINI. During this quarter, RASSINI began the expansion of its plant in Puebla. This new line will start operations in 2Q17 and implies a total production capacity of 196 thousand tons per year the expansion will represent 64 thousand tons more for the Puebla plant, and an increase of around 13.0% for the total company s capacity. The investment regarding the plant expansion is considered to be about US $13.0 million which will represent a significant increase in the firm s CAPEX. In line with our investment thesis, FCF generation continues as the main highlight of the overall report. Despite higher CAPEX, strong operating figures boosted FCF generation to amount P$520.1 million. Moreover, Net debt increased 22.8% QOQ to P$1.8 billion due to the US dollar appreciation and a dividend payment of P$480.2 million DCF Valuation 3Q-4Q16e 2017e 2018e 2019e Perpetual CF 9.2% 7.3% 1.1% 1.1% EBITDA 1,306,173 2,887,405 3,099,462 3,134,186 3,134,186 WORKING CAPITAL 112,275-115,123-92,659-89,574 - TAXES - 481,374-640,386-633,982-615,960-615,960 OPERATING CASH FLOW 937,074 2,131,896 2,372,821 2,428,653 2,518,227 CAPEX - 674,360-834,466-763,536-769,510-500,000 FREE CASH FLOW FIRM 262,714 1,297,430 1,609,285 1,659,143 2,018,227 20,141,984 WACC 13.0% g 3.0% DCF 279,293 1,220,412 1,423,894 1,298,893 13,951,996 TOTAL PRESENT VALUE 18,174,487 2Q16 Net Debt 1,867,312 Minority Part. @P/BV 612,699 Equity Value (P$) 15,694,476 Shares Outstanding (000's) 320,143 THEORETICAL PRICE PER SHARE 49.0
GBM Fact Sheet Financials (US$ Mil 2014 2015 TTM 2016e 2017e Revenues Growth YOY 2014 2015 TTM 2016e 2017e P&L NAFTA 29.3% 21.3% 21.6% 26.7% 5.2% Revenue 11,900 12,897 14,307 15,804 16,567 Brazil -20.5% -42.8% -38.2% -12.1% 0.0% Var (%) 14.8% 8.4% 22.5% 4.8% Total 14.8% 8.4% 8.4% 22.5% 4.8% Gross Profit 1,821 2,415 2,985 3,323 3,479 Gross Mg. 15.3% 18.7% 20.9% 21.0% 21.0% Valuation 2014 2015 TTM 2016e 2017e Operating Profit 1,061 1,448 1,896 1,951 2,157 EPS 2.7 2.8 4.0 3.8 4.2 Operating Mg. 8.9% 11.2% 13.3% 12.3% 13.0% P/E 16.0x 15.7x 11.0x 11.4x 10.2x EBITDA 1,507 2,014 2,542 2,643 2,887 EV/EBITDA 11.5x 8.0x 6.4x 6.1x 5.4x Var (%) 19.3% 33.7% 31.2% 9.2% P/B 4.7x 3.7x 3.0x 2.7x 2.2x EBITDA Mg. 12.7% 15.6% 17.8% 16.7% 17.4% P/Sales 1.2x 1.1x 1.0x 0.9x 0.8x Interest (193) (255) (207) (284) (305) Taxes (239) (359) (460) (555) (575) Return 2014 2015 TTM 2016e 2017e Net Profit 864 884 1,265 1,212 1,355 ROA 8.1% 20.0% 9.6% 24.8% 23.9% Var (%) NS 2.3% 37.2% 11.8% ROE 26.7% 22.3% 26.6% 22.9% 21.2% Net Mg. 7.3% 6.9% 8.8% 7.7% 8.2% ROIC 13.6% 13.1% 16.6% 15.3% 15.9% Balance Sheet FCF Yield 3.9% 9.1% 8.9% 3.6% 7.5% Cash 845 1,223 975 1,252 1,770 Dividend Yield 0.0% 1.8% 2.5% 5.5% 4.4% Accounts Receivable 1,357 1,330 1,799 1,684 1,900 Buyback Yield 0.0% 0.0% 0.0% 0.0% 0.0% Inventory 812 955 1,220 974 993 Fixed Assets 6,234-344 7,627-337 -333 Leverage 2014 2015 TTM 2016e 2017e Total Assets 10,648 4,426 13,223 4,886 5,669 Debt/Equity 1.0x 0.7x 0.6x 0.5x 0.3x Accounts Payable 1,936 1,850 2,603 1,692 1,808 Net Debt/EBITDA 1.2x 0.8x 1.2x 0.7x 0.5x Debt 3,111 2,788 2,843 2,637 2,119 Interest Coverage -6.4x -6.5x -9.2x -6.9x -8.2x Total Liabilities 7,416 6,682 8,461-415 -716 Equity 3,232 3,964 4,761 5,301 6,385 Turnover (Days of) 2014 2015 TTM 2016e 2017e FCF Accounts Receivable 41 37 45 38 41 Operating Profit 1,061 1,448 1,896 1,951 2,157 Inventory 29 33 44 28 27 +Depreciation 446 566 646 693 731 Payables 59 52 65 39 39 -Interests (166) (224) (207) (284) (262) Cash Conversion 11 18 23 28 29 -Cash tax (620) (649) (450) (674) (640) -Working Capital 219 869 52 (168) (115) Liquidity 2014 2015 TTM 2016e 2017e -CAPEX -396-511 -703-1,013-834 Current Ratio 0.9x 1.0x 0.9x 1.1x 1.4x Free Cash Flow* 543 1,257 1,234 504 1,036 Quick Ratio 0.2x 0.3x 0.2x 0.3x 0.5x Investment Risks In addition to the risks related to the macroeconomic aspects in the US, Mexico, and Brazil, we believe the most relevant risks for the company are: 1) Most of the company s revenues are primarily driven by sales to OEMs from the NAFTA and Brazilian markets. Any restriction and/or specifications (such as vehicle size, weight, etc.) from the governments to the OEMs could have a direct effect on RASSINI s production. 2) If Mexico s currency strengthens and Chinese production becomes more cost efficient, expected growth could be lower than originally forecasted, as several OEMs could shift to cheaper auto parts producers.3) There are various potential technology breakthroughs that could dramatically improve the economics of electric cars, directly impacting RASSINI s client base and lowering its future revenues.4)decreases in the amount of automotive credits, as well as in the consumer confidence index, are also among the main catalysts that could directly affect vehicle demand in the country. Stock Price Performance vs Analyst Estimates 50.0 45.0 40.0 35.0 RASSINI 27/10/2015 40.00 M arket Outperformer RASSINI 23/02/2016 41.50 M arket Outperformer RASSINI 22/04/2016 47.50 M arket Outperformer RASSINI 20/07/2016 49.00 M arket Outperformer 30.0 25.0 20.0 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Price Price Target
Important Disclosures: As of this date, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa together with its affiliates beneficially own, directly or indirectly, over 1% of the equity of RASSINI. Other Disclosures: The analyst or analysts involved in the creation of this document hereby certify that the views expressed in this document accurately reflect their personal opinions and that they have not and will not receive direct or indirect compensation for expressing specific recommendations or views in this report. This report has been prepared by GBM and is subject to change without notice. GBM and employees shall have no obligation to update or amend any information contained herein. This report is for informational purposes only, based upon publicly available information, which we believed is reliable, but its accuracy and completeness cannot be guaranteed. GBM makes no express or implied representations or warranties that such information is accurate or complete and, therefore, GBM and employees shall not in any way be liable for related claims. This report does not constitute an offer to buy or sell any security or participate in any trading strategy. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances. Each investor shall make their own determination of the suitability of an investment of any securities referred to herein and should consult their own tax, legal, investment, or other advisors, to determine such suitability. This report may discuss numerous securities, some of which may not be qualified for sale in certain countries or states therein and may therefore not be offered to investors in such countries or states. This report or any portion hereof may not be reproduced, reprinted, sold or distributed without the written consent of GBM.The current document is not issued with the purpose of ensuring a future business relationship with the Issuer; thereby, said document constitutes no promise or guarantee