Long-term prospects remain solid; bracing for short-term volatility
- FY21 raw material cost recovery rate was over 60%; ongoing negotiations with customers and recent easing of commodity prices positive on margin recovery
- Strong order backlog to support future project launches
- Continual customer/product diversification beneficial to its long-term business outlook
- Anticipate some short-term share price volatility due to weak FY21 results; maintain BUY with lower TP of HK$8
Possible easing of margin pressure. Nexteer managed to pass through some 65% of commodity price increase to its customers in FY21 and negotiations are ongoing with global OEMs to further reduce its cost pressure this year. Metal prices have come off from their peak recently, thus providing some relief for auto manufacturers. Besides, the company is constantly improving its production efficiency to reduce operating cost pressure. All these should lead to a recovery in product margins in FY22/23F. We estimate FY22/23F GP margins to improve by 4ppts/1.5ppt to 15%/16.5%.
Record order backlog to support future business growth. In FY21, Nexteer launched 36 new programmes (25% being EV related) and has secured US$5.9bn of new bookings, of which about 80% is high margin electric steering products. Its record order backlog of US$26.8bn has 25% exposure to EVs. The rising global shift towards EVs should drive higher demand for EV related parts, which is beneficial to Nexteer’s business outlook.
Success in broadening customer base and launch of more advanced steering systems to solidify its long-term outlook.
Nexteer has made good headway into the full-size electric truck market in North America and the launch of high power electric steering products from FY22-26 should open more EV opportunities to the company. Steer-by-wire and stowable column technology are scheduled for production in 1H22 and Nexteer aims to be a major player in this segment.
North American automakers (such as General Motors and Ford) have several truck and SUV electric models for launch in 2022-23 (including Ford F-150 Lightning, Cadillac Lyriq and Chevrolet Silverado EV etc). Nexteer is well positioned to benefit given its dominant position in the North American steering product market.
Apart from the incumbents, Nexteer is working to secure NEV opportunities with the Chinese NEV players (NIO, Xpeng, Li Auto) and Tesla’s China business.
Weak FY21 results due to sharp margin erosion could weigh on share price performance in the near-term. FY21 revenue increased by 10.8% to US$3.36bn, with increases across all major markets it operates in. North America, which contributed 58% of total revenue, posted 3% growth, while Europe and Asia Pacific (Asia Pac) posted 26%/20% expansion respectively.
Gross margins were down 2.7ppts to 10.8%, and total gross profit fell c.12% to US$363m. The shortage of auto chips, OEM production disruption and rising raw material prices have negatively impacted its product margins. By markets, EBITDA margin in North America and Asia Pac were down by 4ppts to 8.4% and 0.9% to 18.7% respectively. As a result, blended EBITDA margins contracted by 1.7ppts from a year ago to 10.7%, leading to a 4.6% decline in EBITDA to US$361m.
The dragged on its product margins resulted in FY21 net earnings only inching up by 1.4% to US$118.4m, below expectations. The management has proposed to pay a final DPS of 0.95 US cents (FY20: 0.94 US cents), translating to 20% payout ratio.
Valuation cut; but long-term outlook remains strong. We anticipate 2H22 outlook to improve on pent-up demand and channel restocking. Nexteer’s share price has corrected by about 40% in the past 1 month (especially after the release of its FY21 results) and is currently trading at FY22F 7.3xPE, undemanding in our view given its strong long-term outlook. We cut FY22/23F net earnings by 18%/10% to factor in lower margin assumptions. Our new TP of HK$8 is pegged to 11x FY22F PE (prev: 16x). Maintain BUY.