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Questor: TI Fluid Systems needs to prove it can benefit from electric cars
Just like the banks, the jury remains out on the automotive sector. When tough times take over, have car makers got a second gear instead of crunching straight from boom to bust? Sales have ramped up since the financial crisis but this year they are forecast to decline for the second consecutive year in the United States.
As well as overall output, there are concerns that sales incentives and easy vehicle loans akin to the sub-prime mortgage market have created a bubble that is close to bursting.
TI Fluid Systems knows plenty about boom and bust. What was then known as TI Automotive breached its banking covenants in 2009 when car sales slumped – only two years after it had gone through a rescue by its creditors. The company commands one third of the market for brakes and fuel lines plus 15pc of plastic fuel tank systems that are replacing steel. It supplies all of the major car makers including General Motors, Mercedes-Benz and Hyundai from more than 123 locations in 29 countries and derives a fifth of sales from China.
But despite a heritage that saw it supply the Model T Ford car in its infancy, it has never appeared to be particularly loved by investors.
Going back to 2001, it was unwanted when engineering conglomerate Smiths Group acquired TI’s parent company, but Smiths couldn’t find a buyer so was forced to spin off the asset. Then, its planned stock market flotation in 2016 was scuppered by uncertainty caused by the Brexit vote.
When it eventually did list, last October, the shares were priced at a bottom-of-the-range 255p and slid on their debut. Five months on, they are virtually unchanged giving it a market value approaching £1.4bn.
The market has remained wary of private equity-backed flotations, and rightly so. There are examples such as ConvaTec, the colostomy bag and catheter maker, which began brightly when it floated in October 2016. Poor sales and supply disruptions have laid bare its weaknesses, while backers Nordic Capital and Avista have sold shares before the lock-up period expired.
TI Fluids has Bain Capital to thank for its listed status. The buyout house acquired the business in 2015 from former creditors including US investment manager Oaktree Capital. Market turbulence meant it took a whole two years for Bain to perform what is technically known as a “quick flip”. The bulk of the £400m proceeds have been used to reduce expensive debt but unsurprisingly TI is still over-borrowed versus its peers.
Analysts at Citi – which acted as joint bookrunner for the issue – point to strong cash flow conversion to reduce loans further. From net debt of twice underlying earnings, Citi expects the ratio to fall to 1.1 times by 2021 – leaving it still ahead of its rivals. There is a bigger question. How can a company that has built its business on the combustion engine cope as the industry switches to cleaner, greener alternatives? Predictably, the answer from the company appears to be that it is well placed.
Chief executive Bill Kozyra, the former head of Continental’s North American operations who sold shares worth £13m in the flotation, is bullish because electric cars still need cooling, heating and braking. As JP Morgan points out, TI supplies around €200 (£179) of equipment to each car with a combustion engine, but the company forecasts this to be €700 for a hybrid car or €400 for a pure electric. Worryingly, what it is lacking at this stage are the orders and revenues from the new-wave stuff to prove the industry will support Kozyra’s theory.
The company will signal the direction of travel with full-year figures on March 20. TI is still two thirds controlled by Bain, through a Cayman Islands-incorporated company. Its 180-day lock-in preventing more share sales runs out in April. How fast Bain accelerates away from the stock will clearly affect sentiment.
The shares are not particularly expensive – trading at seven times this year’s forecast earnings and at a sharp discount to its car-parts supplier peer group to reflect the risky pivot it must undertake. There could be a decent growth story here but doubts remain whether TI has emerged from the hands of successive financial owners best placed to exploit it. Investors should slam on the brakes and sell.
Questor says: sell
Ticker: TIFS
Share price at close: 258p