Antolin - The long and the short of it - Model Update - Positioning
All,
Please find our updated model on Antolin here.
The hunt may be on for underperforming European auto suppliers, and Antolin is a well-known case, but this name seems to have taken a turn for the worse in Q225, on the one hand, because international operations are not currency hedged and on the other, because of slow demand in NAFTA and a strategic positioning problem in APAC. Add to that plenty of exposure to European consumer confidence in the home country of its second largest client, and an October 2027 refinancing is looking increasingly unlikely.
Investment Considerations:
- We are isolating net carry of 6.875% between the bonds by shorting the 2028s at 67c/€ for 10% of NAV and are going long the 30s at 68c/€ for 10% of NAV. The two bonds are separated by a pari passu loan maturing in 2029, and all of them will have to be addressed at the same time - probably when the RCF comes springing in October 2027. We think a material steepening of this curve is very unlikely over the next year.
- The operating outlook for the company has worsened considerably in Q225. Management had warned it would be a soft quarter, but the strength of the Euro has reduced revenue and margin contributions from Antolin's international operations (unhedged) to a point where even in management's own words margins are unsustainable. Management is now commencing negotiations with its principal customers - thankfully, only six conversations will address 75% of revenues.
- This could be a volatile name. Trading currently in no-man's-land at 67c/€, or around 23% YTM, On the upside, the bonds could jump conceivably up to 10 points to perhals 15% YTM, if Q3 results in November turn out far better than expected. On the downside, these bonds may struggle to find a bottom when FCF approaches zero in the coming six months.
- Failing a significant margin reset, or equally significant weakening of the Euro, we doubt that Antolin can escape a restructuring now.
- The lower likely trajectory of margins and slower demand in NAFTA and APAC, have destroyed our projected FCF to the point where a DCF becomes unusable. For the record, in 2027, when Antolin reports 2026 results, debt carrying capacity would be so low that recoveries based on that would approach 30c/€.
- The bonds yield over 20% to maturity and so a single short of the 28s could be quite expensive.
Key Conclusions:
- The strengthening Euro and weak NAFTA/APAC demand—exacerbated by halted U.S. production—have crushed Antolin’s margins, reversing early-year optimism. Gross margins fell to 33% and EBITDA to 5%, rendering operations 'unsustainable' (management's words) despite almost stable European performance (Current Trading).
- Antolin’s 5% CapEx-to-sales ratio is typical for the sector, but its low profitability (EBITDA is only 5%) all but erases cash flow. Consequently, the DCF valuation has collapsed, far below peers who achieve >9% EBITDA margins—levels Antolin has targeted unsuccessfully since 2017 (Model; DCF).
- Cost-savings are being absorbed by volume and currency headwinds. Management is now negotiating with clients to recover margins (VW, Stellantis, Ford are 50% of revenue) (Current Trading). The extreme client concentration limits pricing power and heightens refinancing risk. Without a structural margin reset, Antolin’s balance sheet is untenable and requires restructuring (Company; DCF).
- The new g'teed €150m syndicated loan sits pari pasu, but outside the leverage covenant. Guidance for H225 depends on additional "transactions", and likely loan maturity extensions (Current Trading).
- Based on DCF, recoveries would be c.30c/€; applying a 3.5x EBITDA multiple (½ turn below peers) offers better optics but remains generous given near zero normalised FCF (Recap Analysis), (Model).
What would change the outlook:
- Positive: A strong depreciation of the Euro would lift margins significantly.
- Positive: Magin resets from the company's largest clients. Perhaps the high concentration ratio helps facilitate a concerted effort between them. This could avoid a restructuring - otherwise by October 2027.
- Negative: Failure to negotiate a significant uplift in margins with its key clients will lead to restructuring.
- Negative: Asian volumes falling further. On the Q225 call, management hinted that the revenue drop is in part due to Asian OEMs taking local market share, while Antolin is overindexed on international OEMs.
- Negative: - Continued weakness in North American demand. Antolin have seen production halts, indicating a severe situation. We do not know if such halts are to repeat or are at present continuing.
- Negative: A slow-down in European demand, following a further weakening of consumer confidence.
Here to discuss this name with you,
Wolfgang