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Tesma International, Inc. TSM.A - TSX

Tesma International, Inc. TSM.A - TSX. www.tesma.com. Company Description. Tesma International is a leading global supplier of highly engineered engine, transmission fueling systems and components for the automotive industry

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Tesma International, Inc. TSM.A - TSX

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  1. Tesma International, Inc.TSM.A - TSX www.tesma.com

  2. Company Description • Tesma International is a leading global supplier of highly engineered engine, transmission fueling systems and components for the automotive industry • Major product areas are front-end accessory drive systems, water and oil pumps and die castings

  3. FY2002 Results Summary • Quarterly sales up14% to $347.4 million (increase in North American vehicle production volumes of 6%) • $4.6 million increase in tooling sales to $29.7 million (highest quarterly level ever) • Strengthening of the Euro versus the Canadian dollar in the quarter and continued growth in export sales • Sales for the year increased 12% to $1,341.6 million • Income before income taxes increased by 31% to $33.6 million from $25.7 million a year ago, due to North American production volumes, increased volumes and higher content on some existing and newly-launched production programs, improved operating efficiencies, including the North American die casting facility • Partially offset by 4% decrease in European vehicle production volumes in the quarter • NI for quarter decreased 12% to $22.5 million from $25.6 million a year ago • NI for year decreased to $83.8 million from $88.8 million in fiscal 2001, because of one-time nature of tax refunds • Diluted EPS was $0.74 compared to $0.86 a year ago • Diluted EPS for year was $2.81, down from $3.00 in the same period a year ago

  4. Terminology Used • Enterprise Multiple - A ratio used to determine the value of a company. The enterprise-multiple looks at a firm as a potential acquirer would because it takes debt into account - an item which other multiples like the P/E ratio do not. • Enterprise Multiple =Enterprise Value/EBITDA • Enterprise Value - A measure of a company's value, calculated by: market capitalization plus debt & preferred shares minus cash and cash equivalents. • Market Cap - The total dollar value of all outstanding shares, calculated by multiplying the number of shares times the current market price. • **Think of enterprise value as the theoretical takeover price. In the event of a buyout an acquirer would have to take on the company's debt but would pocket its cash.** • EBITDA - can be used to analyze the profitability between companies and industries because it eliminates the effects of financing and accounting decisions. • **A low ratio indicates that a company might be undervalued**

  5. Terminology cont. • P/E Ratio- A valuation ratio of a company's current share price to its per-share earnings. • P/E Ratio = MVPS/EPS • Sometimes the P/E is referred to as the "multiple" because it shows how much investors are willing to pay per dollar of earnings. • In general, a high P/E means high projected earnings in the future. But the P/E ratio actually doesn't tell us a whole lot by itself. It's usually only useful to compare the P/E ratios of companies in the same industry, or to the market in general, or against the company's own historical P/E.

  6. Brief Overview • TSM.A-TSX (today’s close) $25.75 • 12-18 mo. Price Target $33.00 • Key Indices: • 3-5-Yr. EPS Gr. Rate (E): NA • 52-week $39.58-$25.00 • Shares 32.3 million • Float 16.4 million • Avg. Daily Trading 23,700 • Market Capitalization $815.6 million • Dividend/Yield $0.64/2.5% • Fiscal Year Ends July • Book Value $19.17 per Share • 2003 ROE 15.6% • Net Cash $67.1 million • Preferred Nil • Common $619.2 million • Convertible Available No

  7. What are analysts saying? • Sector Outperformer rating • 12-18 month target price of $33.00 based on a 4.25x multiple on 2003E EV/EBITDA • Forecasting Q1/03 EPS of $0.85 versus $0.75 last year (2002) • Above-average return on capital employed • Recent equity offering likely satisfied a lot of the short-term demand for the stock

  8. More Summary Info. EPSP/E EV/EBITDA Multiples 2002 2.81 9.0x 3.5x 2003E 3.15 8.0x 3.3x 2004E 3.40 7.4x 2.9x

  9. Stock Price Performance

  10. Stock Price Performance (more detailed)

  11. Industry Trends and Risks • NA auto production would need to fall 15% before industry stocks would be at long term average multiple on 2003E EPS • Vehicles at highest affordability since 1979 • Lots of incentive packages with NA manufacturers (i.e. 0% financing) • Stocks already contracted 31% from average highs (not expected to go lower) • Price wars b/w Big 3 (DCX, GM, Ford) - helps affordability, but may hurt sales • Union strikes possible • Losing market share to foreign manufacturers (Audi, BMW, Honda, etc.) • Consumer confidence low according to surveys

  12. Outlook - Q1/2003E EPS (ending Oct. 31/2002) $0.85 Versus $0.75, Up 13% Year Over Year • Analysts expect revenues up 16% (mgmt 10%) year over year in Q1/2003 ending October 31 (today) • GM accounts for about 50% of North American sales, and this customer has had the best sales momentum of the Big Three • Ramp-up of the new 4.2 litre Vortec engine (powers the Trailblazer/Envoy mid size SUVs) has been a big boost to Tesma’s sales (this is 7% of North American sales) • European market accounts for 25% - 30% of total sales • The company’s German die casting operation, continues to generate substantial losses (approx. $3 million in its most recent quarter) and is a substantial drag on the European division’s overall profitability • However, new mgmt’s in place at this business and a turnaround plan is being implemented • At its Q4/2002 loss rate, Eralmetall is a drag of approximately $0.35.$0.40 on annual EPS

  13. Tesma Top Five Programs By RevenueRank OEM Key Vehicles 1 GM Full size Pickups, SUVs 2 GM Mid Size SUV's (Envoy, Trailblazer) 3 Ford F F-Series Pickups 4 Ford F Taurus 5 Ford F Focus Source: Company Reports

  14. Medium/Longer-term Outlook • Attacking very large addressable market • Has 10% share of available engine content and about 4% of available transmission content • Working expand product offering (addressable market should grow higher) • Well positioned to benefit from trends • 1. Engines become lighter --> need increased for Noise/Vibration/Harshness (NVH) parts • 2. Diesel engines growing in popularity in Europe in particular, also tend to run rougher, due to their higher compression ratios, resulting in an increased need for NVH products • 3. Company is targeting complete systems, such as engine front covers, which can be worth in excess of $125 per unit • Long-term (three- to five-year) revenue growth approx. 12%-13% • 2002, took in $306 million in net new business versus 2002 full-year sales of $1.3 billion • Considering putting a greenfield plant in Wales to service Jaguar (track record of generating high ROI) • Has a substantial amount of new fuel systems business, which at full volumes, will double the size of this business for Tesma by 2005

  15. Cash Flow/Balance Sheet • For FY2003, operating cash flow of $179 million and capital expenditures of around $125 million expected • Mgmt’s goal to make an opportunistic acquisition that adds a new process/technology or a new customer (Tesma is currently weak with DaimlerChrysler) • Hopes to complete acquisition over the next four to six months

  16. Company-specific Risks • Above-average exposure to GM in North America • Currently a plus, but this level of concentration could obviously work against Tesma if GM’s fortunes reverse • Recent equity issue, closed in July, represented approx. 120 days of average trading volume on the stock • Deal likely satisfied a lot of the short-term demand for Tesma stock • However, Tesma will remain a controlled company, as Magna owns a 44% economic interest and controls 89% of the total votes attached to the A&B shares combined

  17. Industry Comparison P/E Ratio 2002 2003 Decoma 8.5 8.2 Intier 10.2 9.4 Linamar 10.8 11.6 Magna 11.2 8.0 Westcast 9.3 9.3 Tesma 9.0 8.0 Lowest EV/EBITDA: 2002 3.5x versus 4.2x average, and 2003 3.3x versus 3.8x average. Also, below it’s 95-01 average of 4.5x. P/E Ratio is also well below the competition (cheaper/undervalued). Thus, it is my belief that Tesma is undervalued versus the competition when using EV/IBITDA and P/E!

  18. Valuation/Recommendation • Currently trades at 3.3x analysts 2003E EV/EBITDA forecast, versus its Canadian competitors at 3.8x (signal that undervalued) • Pretax return on capital employed expected to be 18% this year (second highest in Canadian auto parts) versus average of 15.6% with competition • Given its strong technology base and small market share, Tesma should have an above-average long-term growth profile • Thus, strong buy, Sector Outperformer rating and a 12-18 month target price of $33.00, based on a 4.25x multiple on 2003E EBITDA

  19. Tesma Inc. Stmt. (summarized)

  20. Tesma CF Stmt. & B/S

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