TIFS: Share proposal

TI Fluid Systems (LSE:TIFS) is an example of an investment proposal submitted to the club using the  "Light touch proposals" in free format.

Introduction

The TIFS report here  is an example of an investment proposal received by the club in July 2019. TI Fluid Systems (LSE symbol: TIFS) was submitted to all members prior to the July 2019 monthly meeting. This proposal is an instance of the "Light touch proposals" in a free format.

Members would then have a chance to review the TIFS submission. At the meeting, the proposer presents the share, followed by an extensive session of Q&As. The club may then go through the voting process to decide whether to buy (invest), not buy, postpone the decision, opt for a conditional buy or other decisions. 

Members normally submit proposals using their own/preferred investment strategy and approach. TIFS was proposed under the "recovery & special situations" investment objective using a combination of fundamental and technical analysis (TA) as investment strategy. At any one time, the club would have adopted a preferred method & templates for proposals (see here for the various methods the club adopted over time).

TIFS was voted as a buy in the September 2019 meeting, bought in September 2019 at 172.71p a share; it is still an entry in the Mobius portfolio (at the time of writing in January 2022).

The entry below is the document as submitted by the proposer (as a PDF document):

The investment case  (July 2019)

For my watch-list entry, I introduce TI Fluid Systems (TIFS), a ~£1bn  leading global manufacturer of automotive fluid storage, carrying and delivery systems for light vehicles.

• TIFS is a ~£1bn FTSE 250,  part of the automotive (auto-parts) industry, floated on the LSE in October  2017 at 250p. Current share price is 202p

• TI Fluid Systems plc is a leading global manufacturer of highly engineered fluid storage, carrying and delivery systems, primarily providing products and services for passenger cars, crossover vehicles, SUVs, vans and light trucks with a gross vehicle weight of six US tonnes or less (light vehicles). 

• The Group operates with two divisions: 

  1. the Fluid Carrying Systems (FCS) division, which manufactures brake and fuel lines and chassis bundles, thermal management fluid systems, including HEV and EV thermal management products, and powertrain products, and 

  2. the Fuel Tank and Delivery Systems (FTDS) division, which produces fuel tank systems and pumps and module fuel delivery systems.

• Its main line of business is fuel carrying systems where it has a 35% market share and has developed strong relationships with all the global vehicle manufacturers. It has an untapped opportunity to leverage this strong market position to drive growth in the electric vehicle and hybrid electric vehicle markets. Electric vehicles require a substantial increase in additional fluid content to thermally manage them effectively. In addition, by using lightweight nylon lines 

  • TI Fluid has reduced the weight of a vehicle by 30% to 60% compared to traditional aluminium and rubber.

  •  The company has been awarded significant contracts for the design of thermal efficiency management systems. TI Fluid estimates it is currently seeing a 50% share of these electric vehicle systems. They have a lifetime value of $700m and an eight to 10-year lifespan.

  • Its second line of business (fuel tank systems) has a 15% market share. The company has developed a pressurised plastic fuel tank that utilises proprietary technology to meet the new increased fuel vapour pressure requirements of hybrid electric vehicles. Management estimates it is taking a 20% market share in this segment

 I am proposing TIFS because

• I see TIFS as a great company at the wrong price.  It is currently trading at a PE of 6-7 with a recurring revenue of ~ €3bn and profit of  ~ €180M

• It is a really good company and a really good investment opportunity.

• There are risks and these are in my opinion overpriced (I try to mitigate and quantify these in my adjusted valuation below).

Strong points:

• Market leader in critical auto-parts for the major global vehicle manufacturers. Proven delivery, product pipeline & R&D over decades.

• Strong forward looking products & contracts (aligned for electrical vehicles markets)

• Low valuation for a cash generative with a proven model for a long time

• Clear stop loss, exit criteria  (from TA perspective)

• Stock/company still unknown and under the radar - TIFS is organising a capital markets day for analysts and investors in September, which will hopefully raise its profile and increase the general understanding of the business model.

Assessment risks considered (what’s the catch)

• Bain Capital has a 54% holding but a 2019 PE ratio of just 6.6, an EBITDA multiple of 3.5 and a free cash flow yield of 13.3% for a proven business model is the wrong price.’ To put that in some context, the sector median EBITDA multiple is 6.6-times.  

• The shareholder list is dominated by the private equity group Bain Capital and a few large institutions, limiting liquidity; Bain loaded the company with a lot of debt prior to floating it in October 2017; and the business is not well known outside a few fund managers and analysts. Bain last year sold a bit of its stake and is likely to sell more shares in the future, such is the model of private equity firms

  • It is in Bain’s interest to see share price move upwards to dispose more of its stake. In my view, even if it decides to get it back to private equity, the price will rise from where it is to at least 250p+. So either way, it should be a plus.

• Another factor to consider is weak (negative) market sentiment towards anything related to the automotive sector.  TI Fluid’s most recent full year results, published in March, talk about 2018 being a ‘great year for the company. Pre-tax profit increased by 37% to €217m. CEO: ‘Despite a slight softening in global light vehicle production growth, we achieved strong organic growth, solid profit margins and free cash flow generation. 

My assessment/Valuation

Strong points

• Low valuation: Low PE (6-7), PEG (0.40), PSR/PBR/PCR, PcfR(0.3, 1, 3.5, 2)

• market leader, proven delivery & products, existing & future contracts, well positioned for the EV market, 

• still little known, under major investors radar

• Clear stop-loss of around 160p

Against

• Debt level:  Asset is ~£3bn (including a £1bn intangibles) against a £2bn debt level, a gross gearing of 67%

• Large holding by Bain (50%), limiting liquidity/availability

• Automotive sector sentiment

In my valuation,

1. I have taken a conservative estimate that future sales/EBITDA/profits will remain at 2019 level (even though FITS provided higher forecasts)

2. To mitigate the debt level, I have augmented the annual net interest paid to reach a nominally gross gearing of 50%, the annual interest paid should  go from  €53M to €71M. This leads to an approximate PE of 9. Simple maths in €M: (1120 / (140 -  (71-53))), where  €1.12bn is market cap,  €140M is earning after tax. 

3. In terms of liquidity & Bain capital holdings, I am adding a 20% premium (penalty) to buy or sell the stock.

With points (1-3) above,  and aiming for a market average PE of 17 with the 20% premium, this would give a target share price of 305p  (202*17/9)*0.8.

Risk/reward ratio is 2.45 (305-202)/(202-160) 

 Summary: I recommend TIFS for immediate purchase by the club

• It is a great opportunity from an investment (and a great company’s) perspective.

• With a risk/reward ratio of 2.5, share price could go up  305p & further

• The risks can be mitigated  in part by defining by a stop loss of about 160p, as clearly indicated by TA. So at today’s price, it means a 21% drop for a really conservative 52% uplift.