Garrett Motion ($GTX) — FY21 Update

Along with the recent post on NN Inc ($NNBR), I’m getting around to looking at GTX as well… Here’s a link to the GTX page in the Value Library.

As a quick reminder on the thesis here:

  • GTX was spun from Honeywell and quickly went into bankruptcy after being saddled with asbestos liabilities
  • Post-bankruptcy, GTX has a confusing capital structure with debt and multiple classes of preferred shares
  • Management is actively working to clean up the capital structure while continuing to generate plenty of FCF at which point the stock should re-rate (likely in 2023)

FY21 Results…

The trends felt very similar to NNBR…

  • Q4 revenue fell ~15% to $862m and EBITDA fell 13% to $129m
  • Full year revenue grew 20% to $3.6bn and EBITDA grew 38% to $607m
  • 2022 guidance calls for 7% revenue growth (midpoint), 2% EBITDA growth (midpoint), and FCF of $440m
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Supply chain, chip shortages, inflation, etc. are all still impacting GTX much like peers.

Capital Structure…

GTX has 2 sets of preferred shares —

  1. Series A will convert to common in ~2Q23
  2. Series B will need to be repaid with cash or new debt
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They repaid $211m of the Series B in Q4 and paid another $197m in 1Q22. After the February payment, the Series B value recorded as a liability will be $207m.

The Series A shares should be treated like common stock and while data sources won’t pick them up, management is doing the right thing by treating them as part of the market cap.

To recap — we’re “pretending” that the both sets of preferred shares have gone away, in that world, we have 311m shares outstanding, gross debt of $1.43bn, and cash around $200m.

Valuation…

Valuing GTX is slightly more challenging than the NNBR exercise because it’s more of a traditional, pure-play auto supplier. That group trades between 4-7x EBITDA with an average of 5.5x — right where GTX sits.

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What makes GTX more interesting than the rest of the group is that they’re stuck from deploying capital until they fix this non-fundamental issue (capital structure / preferred) while all of their competitors are already paying dividends, buying back stock, making acquisitions, etc. — those valuations already reflect those capital allocation policies!

On top of that, even when including the cost of the Series B preferred take-out, leverage is already where it needs to be at <2x net leverage. Meaning GTX should be able to spend all or most of FCF on capital returns or M&A starting sometime in 2023.

So what’s that worth?

The easy answer is that it should be worth more once all preferred shares are gone and they announce a formal capital allocation plan!

Realistically, competitors with similar balance sheets are trading at 10-12x earnings/FCF. With $440m in FY22 FCF that would be $14-17 per share vs. $7.40 today (90%+ upside). Using the median group earnings multiple (8.5x) would net $12/share for GTX.

One thing I’m watching for with GTX is a plan or some numbers around their exposure to ICE. Almost all of their competitors have outlined plans to shift revenues to electric vehicles over the next 5-10 years and GTX is starting from zero EV exposure today. Unless or until that happens, I’d guess that will have some dampener on their multiple…