Investment Alert
Sollers published expectedly
good FY2012 results
Konstantin Romanov, CFA, Senior analyst,
RomanovK@sovlink.ru
SVAV
BUY
On April 8, Sollers published FY2012 results. The published financials are
generally in line with our expectations and we do not expect them to
significantly affect the price of company’s shares. Sollers’ own brands
showed the results slightly below our estimates, but it was fully
compensated with good performance of joint ventures. In 2013 the
passenger car market is expected to be weak, but Sollers should be able
to increase production due to launch of new models. We confirm our
previous target price of USD 38.6 per share with BUY recommendation.
Target price: USD 38.6
Upside: 59%
Stock data
Ticker
Shares
1 GDR represents
Price, commons, USD
M.Cap, USD mln
EV, USD mln
Free Float
Free Float, USD mln
SVAV RX
34 270 159
24.3
833
1 085
40.9%
341
We highlight the following key points:
Market performance
Absolute
Relative to RTSI
Price range, USD
High
Low
shares
shares
1 month
-6.0%
1.3%
6 months
15.1%
21.0%
shares
shares
25.9
23.7
26.7
19.6
Financials, RUB mln
2011
2012
2013E
Revenue
69 531
65 549
64 343
Gross profit
12 212
14 074
13 561
Adj. EBITDA*
6 123*
7 436*
7 035
Adj. operating income*
4 502
6 323
6 132
Net income
4 694
5 881
5 957
* - adjustment is made for one-off gain on formation of JVs
Margins
2011
2012
2013E
Adj. EBITDA margin*
8.8%*
11.3%*
10.9%
Adj. operating margin*
6.5%*
9.6%*
9.5%
Net margin
6.8%
9.0%
9.3%
* - adjustment is made for one-off gain on formation of JVs
Ratios
2011
0.49
5.5
5.6
EV/S
EV/Adj. EBITDA
P/E
2012
0.52
4.6
4.4
2013E
0.53
4.8
4.4
Relative performance
2.0
1.5
1.0
Source: Bloomberg
RTS
07.04.13
07.02.13
07.12.12
07.10.12
07.08.12
07.06.12
07.04.12
0.5
Sollers
April 9, 2013
Revenue declined by 5.7% y-o-y to RUB 65.5 bln due to termination of
Fiat business... Revenue from sales of vehicles decreased by 7.4% y-o-y,
because Sollers ceased Fiat cars production business, consequently, total car
sales dropped by 8.5% y-o-y in 2012 to 108,200 vehicles. However, UAZ sales
were 10.4% up last year and SsangYong sales significantly outperformed the
Russian car market (+10.6%) with 32.3% y-o-y increase. In 2H2012 Sollers
demonstrated 11.7% revenue growth, despite the major part of Fiat stocks was
sold in first half of the year.
… while cost of sales dropped by 10.2% y-o-y in 2012. Termination of Fiat
business also positively affected cost of sales item. Expenses on materials and
components decreased by 8.7% y-o-y in 2012, which is in line with car sales
dynamics (-8.5% y-o-y). Significant decline in depreciation (-27.5% y-o-y) last
year is explained by the transfer of 2 plants in Elabuga and Naberezhnye Chelny
to Ford Sollers JV in 2H2011. Labour costs and administrative expenses are also
under control: 7.2% and 4.5% y-o-y growth in 2012 respectively is in line with
inflation.
Joint ventures have already started generating profit. Ford Sollers JV
generated net income of RUB 1.98 bln, which is 46% above our expectations.
However, its 2012 operating profit of RUB 3.28 bln is almost in line with our
estimate (RUB 3.40 bln). Unfortunately, low transparency of joint ventures does
not allow us to make more detailed analysis of foreign exchange gains, which do
not influence EBIT, but affect net income significantly. Mazda Sollers, which was
launched only in September 2012, had RUB 95 net income. We remind that this
JV is responsible for production of vehicles only, while distribution is made by
Mazda, consequently, its revenue is formed on costs + margin basis. Sollers Isuzu
received RUB 134 mln net income due to recapitalization only, while its
operating income was slightly negative.
In Sollers’ margins were under pressure of negative market conditions in
2H2012. In order to make profit and margins analysis we calculated adjusted
operating income and EBITDA, which do not account for non-cash one-off net
gain on formation of JVs. In 2H2012 adjusted EBITDA declined by 10.9%,
compared to 1H2012 and adjusted EBITDA margin deteriorated from 12.7% to
10.1%. First, starting from September production margin on SsangYong vehicles
is eared by JV with Mazda, while Sollers gets only distribution margin. Before
September Sollers earned both margins itself. This should also negatively affect
2013 Sollers margins. Second, market competition increased in 2H2012, because
demand weakened, while dealer’s stocks were formed on the basis of healthy
demand in 1H2012. Compared to 2011, last year adjusted EBITDA margin
improved by 2.5 pp to 11.3%, which corresponds to the normal margins of
global automakers.
Decline in debt load allows Sollers to pay dividends for 2012. At the end of
last year Net debt/ Adjusted EBITDA ratio was 1.1 only vs. 2.3 at the end of 2011.
Sollers’ management had announced the decrease in debt load as one of the key
targets several years ago. As the goal is achieved by now, the company is going
to pay dividends, which could reach 30% of Sollers’ 2012 consolidated net
income. In this case dividend yield will be 6.8%. The cut-off date was on April 8.
Tel.: +7 495 967-1300 • Fax: +7 495 967-1311 • research@sovlink.ru • http://www.sovlink.ru
| 1
Investment Alert
April 9, 2013
On the meeting with analysts management disclosed the following
supplementary information:
The Russian market is expected to decline slightly in 2013...
According to Sollers management, the passenger car market, including
LCVs, will decrease up to 5.0% this year. The market was supported by
healthy demand in 1H2012 and rather aggressive stocks sell-off in 2H2012.
However, Sollers expects SUVs segment to continue growing this year.
Small-class SUVs (on B- and C-class platforms) will become the drivers for
the entire segment.
… but Sollers will increase sales due to the launch of new models.
Among the key projects of the company and its JVs we highlight CKD
production of Ford Kuga and Ford Explorer, which will provide higher
margins, compared to SKD production. The company is going to launch
cheap version of Ford Focus to compete with Hyundai Solaris and
Volkswagen Polo Sedan. Sollers with UAZ and SsangYong brands focuses
on SUV niche, which is expected to continue growing.
Spare parts business is under development now. Sollers currently
improves its competences in aluminum casting. Taking into account the
obligations to increase production localization, which were took by global
automakers, this segment has very good prospective. We remind, that
according to Amended Regulation 166, in 6 years after signing the
agreement the localization level must reach 60%, including 30%
localization of engines. Therefore, the demand for locally produced spare
parts will be from both Sollers Group and other automakers.
The target dividend payout ratio for next several years is 30-40%.
The company management announced its plans to return to the pre-crisis
dividend policy. This means, that the target payout ratio for the next
several years is 30-40% of total net income, including Sollers’ share in the
results of joint ventures. Consequently, we expect the dividend yield to
exceed 5% in the next coming years.
The possible introduction of ‘salvage payment’ should be
compensated. According to Sollers CFO, agreements with the Russian
Government under Amended Regulation 166 stipulate compensations in
case of any changes in regulation, which negatively affect the projects
under these agreements. Consequently, if the ‘salvage payment’ in cash is
imposed on the Russian automakers, the Government should provide
some compensation mechanisms, which comply with the WTO regulation.
Tel.: +7 495 967-1300 • Fax: +7 495 967-1311 • research@sovlink.ru • http://www.sovlink.ru
| 2
Investment Alert
April 9, 2013
Table 1. Sollers: key financial indicators, RUB mln
Vehicles
Automotive components
Engines
Other sales
Total revenue
Materials and components
Labour costs
D&A
Other costs
Cost of sales
Gross profit
Gross margin
Distribution costs
General and administrative expenses
Operating profit
Operating margin
Net result on formation of JV
Adjusted operating income*
Adjusted operating margin*
D&A
EBITDA
EBITDA margin
Adjusted EBITDA*
Adjusted EBITDA margin*
Interest expense
Share of result of JVs
Net income
Net margin
2012
55 071
5 841
1 684
2 953
65 549
-40 877
-5 501
-884
-4 213
-51 475
14 074
21.5%
-2 551
-5 205
7 245
11.1%
922
6 323
9.6%
1 113
8 358
12.8%
7 436
11.3%
-1 574
1 149
5 881
9.0%
2011
59 497
5 923
1 400
2 711
69 531
-44 775
-5 131
-1 220
-6 193
-57 319
12 212
17.6%
-2 578
-4 982
8 509
12.2%
4 007
4 502
6.5%
1 621
10 130
14.6%
6 123
8.8%
-2 827
47
4 694
6.8%
Change
-7.4%
-1.4%
20.3%
8.9%
-5.7%
-8.7%
7.2%
-27.5%
-32.0%
-10.2%
15.2%
+ 3.9 pp.
-1.0%
4.5%
-14.9%
- 1.1 pp.
-77.0%
40.4%
+ 3.1 pp.
-31.3%
-17.5%
- 1.8 pp.
21.4%
+ 2.5 pp.
-44.3%
25.3%
+ 2.2 pp.
2H2012
28 941
3 334
864
1 443
34 582
-27 119
7 463
21.6%
-1 441
-3 100
3 806
11.0%
922
2 884
8.3%
619
4 425
12.8%
3 503
10.1%
688
3 272
9.5%
1H2012
26 130
2 507
820
1 510
30 967
-24 356
6 611
21.3%
-1 110
-2 105
3 439
11.1%
0
3 439
11.1%
494
3 933
12.7%
3 933
12.7%
461
2 609
8.4%
Change
10.8%
33.0%
5.4%
-4.4%
11.7%
11.3%
12.9%
+ 0.3 pp.
29.8%
47.3%
10.7%
- 0.1 pp.
-16.1%
- 2.8 pp.
25.3%
12.5%
+ 0.1 pp.
-10.9%
- 2.6 pp.
49.2%
25.4%
+ 1.1 pp.
* - adjustment is made for one-off gain on formation of JVs
Sources: Sollers, SOVLINK
Table 2. Sollers: key balance sheet indicators, RUB mln
Total assets
Total debt
Net debt
Net debt/Adjusted EBITDA
31.12.2012
46 173
10 440
7 880
1.1
31.12.2011
49 094
16 834
13 877
2.3
YoY
-6%
-38%
-43%
-53%
30.06.2012
46 543
14 353
11 759
1.5
Change
-0.8%
-27.3%
-33.0%
-29.1%
Sources: Sollers, SOVLINK
Table 3. Sollers: key operating results, ‘000 vehicles
2012
2011
Change
2H2012
1H2012
Change
Sollers' own brands
UAZ
SUVs
LCVs, MPVs
SsangYong
Fiat Ducato
Fiat passenger cars
Total
70.3
32.1
38.2
32.8
2.4
2.7
108.2
63.7
30.2
33.5
24.8
13.2
16.6
118.3
10.4%
6.3%
14.0%
32.3%
-81.8%
-83.7%
-8.5%
37.6
16.5
21.1
17.9
0.3
0.0
55.8
32.7
15.6
17.1
14.9
2.1
2.7
52.4
15.0%
5.8%
23.4%
20.1%
-85.7%
-100%
6.5%
Ford Sollers JV sales
Transit
Kuga
Explorer
Focus
Mondeo
Others
Total
11.5
4.2
2.1
92.2
15.0
5.9
130.9
7.4
2.9
0.5
82.5
15.1
9.7
118.1
55.4%
44.8%
320.0%
11.8%
-0.7%
-39.2%
10.8%
Sources: Sollers, SOVLINK
Tel.: +7 495 967-1300 • Fax: +7 495 967-1311 • research@sovlink.ru • http://www.sovlink.ru
| 3
Investment Alert
April 9, 2013
Stock recommendations
STRONG BUY:
BUY:
HOLD:
SELL:
Upside over 25%; confidence level – high /
upside over 100%; confidence level - low
Upside between 15 and 25%; confidence level – high / upside between 25% and 100%;
confidence level – low
Upside of less than 15%; confidence level – high /
upside of less than 25%; confidence level – low
Target price at or below current price levels
SOVLINK LLC
Tel.: +7 495 967-1300
Fax: + 7 495 967-1311
Kremlin embankment 1. bld. 2.
Moscow. 119019. Russia
www.sovlink.ru
research@sovlink.ru
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