Interim results hit by lower shipments and margin pressure
- 1H22 results in line with profit warning
- Anticipate earnings outlook to improve on better shipment and product margins
- New programme launches, easing raw material costs and new order wins positive on future earnings
- Maintain BUY with new TP of HK$8.20, based on 12x PE FY23F
1H22 adjusted net earnings fell 54% y-o-y to US$38.3m, in line with profit warning
Nexteer’s 1H22 revenue increased y-o-y by 3.3% to US$1.8bn. The North American revenue grew 7% y-o-y, accounting for 61% of total revenue. Revenue for China and Europe dropped 4.6% and 11.2% respectively. The Chinese business was affected by the pandemic lockdown and disruption in supply chain, which pulled down production volumes. EBITDA margin fell by 3.5ppts to 8.8% due to inflationary pressure and low shipment level. Due to a deferred tax benefit arising from its US operation which had resulted in an increase of tax expense by US$49.4m, Nexteer reported an interim net loss of US$11.1m compared to profits of US$83.1m. Excluding this item, adjusted net earnings would have declined by 54% y-o-y to US$38.3m.
The company did not declare any interim dividend, the same as last year.
Sound financial position. Working capital control and capex discipline resulted in operating cash inflows of US$122m in 1H22 vs US$95m in 1H21 and a smaller free cash outflow of US$7m compared to US$44m in the same period last year.
Business outlook expected to improve
Nexteer launched 17 major programs in 1H22, 14 of them were in the APAC market. Going forward, it will continue to launch new programs in 2H22, achieving at least 30 launches in 2022. Nexteer secured US$4.4bn new bookings in 1H22, reaching almost 70% of its target for FY22. The company expects backlog bookings to increase, with APAC market having the largest share. Supported by favourable government stimulus measures in China, and the global trend to electrify vehicles, demand for electric vehicles will continue to grow, and this could potentially drive up Nexteer’s bookings and sales revenue in 2H22.
Nexteer has been securing new orders from global OEMs, including winning new accounts, and expanding its product offerings. For instance, after securing a large order to supply column products to a global EV maker in 2021, Nexteer secured an order to supply drive line products to this same customer in 1H22. Nexteer will continue to explore steer-by-wire and EPS products with the OEMs in future to increase its product portfolio, thereby opening more business opportunities. Nexteer’s steer-by-wire product is a market leader, especially in terms of technological aspects. Other global OEMs have also showed interest in this high-margin product, as they switch from offering ICE vehicles to electric vehicles.
Nexteer will be launching a new product, eDrive, with first order from a China OEM in 3Q22. The product will offer greater fuel efficiency, cost efficiency and emissions reductions. Apart from that, new stowable column and steer-by-wire products will be rolled out by 2025. Nexteer is diversifying its product offerings to expand its customer base in the short term.
Although inflationary pressure has impacted product gross margins in 1H22, Nexteer expects the pressure to soften in 2H22. While easing commodity prices is positive on product margins, returning to pre-pandemic level is expected to take some time. The pressure on supply chain is also softening and together with easing raw material costs, vehicle production should increase.
Lowered FY22/23F earnings to factor in weak 1H22 net earnings; maintain BUY on improving earnings outlook
We cut our FY22/23F net earnings by 24%/13% to factor in lower margins post the weak 1H22 performance. We believe FY23 should better reflect its earnings fundamentals and hence rolled over our new TP to FY23F earnings to arrive at HK$8.20, pegged to 12x PE (1SD below mean).
We maintain BUY rating on Nexteer on improving 2H22 outlook after a bumpy 1H performance.