Introduction
I have been keeping an eye on Forvia (OTCPK:FURCF) (OTC:FAURY) for several years now, as the parts supplier for the automotive sector has been working hard to expand its product offering and to increase its margins. I wasn’t a big fan of the acquisition of Hella, a German manufacturer of electronics and lighting components for cars, but Forvia already generated 190M EUR in annual cost synergies in 2023 and expects the total synergy benefits to come in around 350M EUR by the end of 2025. That would be pretty good considering the total size of the acquisition was less than 7B EUR.
Forvia has its primary listing in France, where it’s trading on Euronext Paris with FRVIA as its ticker symbol. The average daily volume is approximately 1.1 million shares per day, and that makes it the most liquid listing. As the company reports its financial results in Euro, I will use the Euro as the base currency throughout this. The current share count is approximately 197.1M, resulting in a market cap of just under 2.96B EUR, taking the 0.50 EUR dividend into consideration.
Looking back at the strong results in 2023
As the company doesn’t publish detailed financial results on a quarterly basis and the quarterly trading updates don’t contain nearly as much information as the more detailed financial results, I wanted to have a look back at the 2023 results of Forvia as those will provide the stepping stone to continue to grow in 2024 and meet its 2025 objectives, which I will discuss later in this article.
In 2023, Forvia was able to increase its revenue by approximately 14% to in excess of 27B EUR while its operating income increased by in excess of 35% on the back of the higher revenue and a pretty substantial margin expansion (the operating margin increased from 4.3% to 5.3%).
As you can see below, the operating income after the amortization expenses related to the intangible assets obtained through M&A was approximately 1.25B EUR. The other non-recurring operating expenses decreased sharply, but unfortunately the finance costs increased, which isn’t really a surprise given how the interest rates on the financial markets have evolved.
Despite the higher finance expenses, the company still reported a very substantial increase in its pre-tax income, mainly thanks to Forvia’s ability to integrate the Hella acquisition into its existing corporate model. After deducting the total tax bill of approximately 232M EUR, the net income was 371M EUR before taking the loss of 5.4M EUR from discontinued operations into consideration. The net income from continuing operations was 365.6M EUR, of which 222.2M EUR was attributable to the common shareholders of Forvia (compared to a 382M EUR loss in FY 2022). This meant the FY 2023 EPS was approximately 1.13 EUR, while the EPS from continuing operations was 1.15 EUR.
As Forvia added quite a bit of debt to its balance sheet when it acquired Hella, the cash flow performance of the company remains very important to reduce the debt, and more important, to reduce the interest expenses.
The total reported operating cash flow was 2.61B EUR, but this included a 770M EUR contribution from working capital changes but on the other hand it also took a 515M EUR cash tax bill into account, although the income statement indicates only 232M EUR in taxes were owed based on the 2023 result (with the majority of those taxes as deferred taxes).
On the other hand, I still need to deduct the 133M EUR payments to minority interests and the 246M EUR lease payments. This results in an adjusted operating cash flow of approximately 1.75B EUR.
The total capex was approximately 2.2B EUR (including 1.05B EUR in capitalized development costs) and this means Forvia was free cash flow negative in 2023.
That being said, keep in mind this includes a very substantial growth investment. The total amount of depreciation and amortization expenses is just under 1.9B EUR per year, while Forvia spent 2.43B EUR on capex and lease payments.
The trend will continue in 2024
Those investments should help the company to continue its growth trajectory and the order book continues to grow. In the first quarter of 2024, Forvia added 6.5B EUR in orders to its order book which represents an increase of approximately 1B EUR compared to a year ago, thanks to the very strong performance in Asia where BYD is an important customer of Forvia.
And although the company reported a 1.7% revenue decrease in the first quarter of this year, the image below shows this is mainly related to the FX changes as the organic revenue growth came in at about 206M EUR.
Forvia has reiterated its guidance for this year. It wants to achieve a total revenue of approximately 28B EUR, while its operating margin should jump once again to 5.6-6.4% of the revenue. The midpoint of 6% would represent another 70 bp increase compared to the 5.3 operating margin reported in FY 2023. This, in combination with another revenue increase, would boost the operating income by 240M EUR to 1.68B EUR (before the amortization of intangibles from acquisitions). The additional profit would be very accretive to the pre-tax income performance of Forvia, and has the potential to boost the net profit attributable to the Forvia shareholders by 50%. Another important element is Forvia’s expectation to reduce the debt ratio to less than 1.9 times EBITDA by the end of this year.
The company also confirmed its 2025 guidance, which was posted a while ago. Forvia wants to increase its revenue to 30B EUR and generate an operating margin of 7% of the revenue. An increase of the operating margin from 6% to 7% in one year would be a great achievement, but it likely also indicates I’m perhaps a bit too conservative by using the midpoint of the 2024 guidance as base case scenario. Or, another explanation could be to see a delay in achieving the 7% operating margin.
In any case, if Forvia meets its own targets, its implied operating income would increase to 2.1B EUR, which is an increase of almost 50% compared to the 2023 level. And that will likely more than double the net income attributable to Forvia’s common shareholders, and I think Forvia has a shot at reporting an EPS north of 2.5 EUR per share in 2025.
Investment thesis
The past few years have been difficult for Forvia and the large acquisition of Hella increased its debt level, at a time the interest rates started to increase. However, we definitely saw a turnaround in 2023 as its operating margin increased substantially, and based on the 2024 and 2025 guidance, the operating margin (and operating income) will continue to increase. The main risk to this investment thesis would obviously be a slowdown in the car sales and the demand for Forvia’s products.
I have been relatively positive about Forvia for quite a while now and so far, the share price hasn’t really met any of my expectations. But as explained above, if the 2025 targets are met, the EPS could exceed 2.5 EUR, which makes the current share price of around 15 EUR per share rather attractive.
I currently have no position in Forvia, but I may try to re-enter a long position. I may also write put options on Forvia (in a combination of out of the money and in the money put options).
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