NN Inc ($NNBR) — FY21 Update

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Price: $3 Market Cap: $135m Valuation: 5.8x EBITDA Category: General

FY21 Review…

  • Q4 revenue fell 7% YoY to $110m and EBITDA fell 28% to $12.1m.
  • FY21 finished the year with $477.5m in sales (+11%) and $52.1m EBITDA (+10%).
  • Guidance implies another 10% revenue growth and 15% EBITDA growth in 2022.

NN struggled with supply chain, cost inflation, and chip shortages in the back half of 2022. Management commented they have a good handle on it and passed along most of the materials price increases to customers in 2022.

2022 Guidance…

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Cash Flow…

We’re finally seeing FCF as a targeted metric for NNBR... A company generating $60m in annual EBITDA should be able to turn out a high level of FCF too.

The 2022 guidance of $14-20m still includes some one-time hits from COVID and the Life Sciences segment sale. So hopefully we see this ratchet higher in 2023 and beyond. Guidance is $0.31-0.46/share in FCF on a $3 share price.

On top of the FCF guide, they’ll rake in a one-time $10m from the COVID tax stimulus.

Going into 2023, NN should pick up another ~$2.5m annually from the closure of a manufacturing facility.

Segments…

This slide was pretty interesting from Q4 results presentation — capital spending by segment shows the majority of capital spend is going to the Mobile Solutions business (i.e. automotive). The Power Solutions segment (which is more of an industrial business) actually seems to be fairly asset-light with ~$2m capex on $22m+ annual EBITDA.

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Power Solutions has been running 1-2% capex to sales and Mobile Solutions is running 5%+ (substantially more capital intensive).

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Valuation…

NN ended the year with ~43.5m shares outstanding. The Series D Preferred Shares came with penny warrants for 1.9m shares for a 45.4m share count. [There are another 1.5m warrants outstanding but at way higher strike prices so I’m ignoring those.]

Calculating enterprise value is a bit tricky with the preferred shares. The initial balance was ~$62m but they accrue dividends at a 10% rate. These are currently being paid in-kind. At 2021, the accrued balance is close to $68m. I’m estimating these preferred shares get eliminated within the next 3 years so to keep it simple I’ll use an undiscounted $86m “liability” for the Series D shares — $68m at 2021 + 3yrs of $6m.

Traditional net debt is $125m at yearend 2021.

With a $3 share price and 45.4m s/o = $136m market cap + $125m net debt + $86m preferred liability = ~$350m enterprise value.

At $60m in EBITDA that’s a 5.8x multiple. Midpoint FCF of $17m implies a <8x FCF multiple (when adding back the $13m cash interest I get ~12x EV/FCF).

Short-term, NNBR should trade closer to its long-run average EBITDA multiple of 7.5x. On $60m 2020 EBITDA = $450m EV. Backing out $125m net debt and $86m preferred equity nets a $239m market cap. Add in the $10m CARES Act funds for $249m equity value or $5.50 per share — 80%+ upside over the next 12 months.

Where NNBR is more interesting than your average auto supplier is the business mix… There’s a great little industrial business tucked inside here. Despite that, the whole company trades like auto supplier peers in the 6x EBITDA neighborhood while industrial companies grab 8-10x (or more) EBITDA multiples.

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A quick reminder on the thesis here:

  • NNBR is a combination of a decent auto supplier and an attractive industrial supplier trading at a big discount to both of those peer groups
  • NN underwent a life saving balance sheet transformation in 2020 by selling their Life Sciences division for >12x EBITDA and taking leverage from 6.1x to 2.5x today
  • On top of that, they have an excellent organic growth outlook and improving FCF — 7.5% annual sales growth from 2020-2025
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