TI Fluid Systems stuck in the slow lane

But while the transition to greener vehicles bodes well for the long term, the immediate picture is less encouraging. Disruption from Covid-19 saw organic revenue shrink by 16 per cent at constant currencies to €717m (£638m) in the three months to 31 March. IHS Markit forecasts that global light vehicle production will fall by more than a fifth in 2020, with further deterioration possible. The weaker outlook has prompted analyst downgrades. Broker Peel Hunt expects adjusted operating profit to plummet from €340m to €40m this year and, anticipating a slower industry recovery than following the financial crisis, does not see profits rebounding to pre-coronavirus levels even by 2022.

With US-China trade war tensions weighing on car manufacturers, sales growth was lacklustre prior to this crisis. While TI Fluid Systems has a track record of outperforming the wider light vehicle production market, revenue only advanced by 2 per cent between 2016 and 2019. At the same time, the adjusted operating profit margin declined by 0.8 percentage points to 10 per cent, hit by product launch costs, lower volumes in China and higher resin prices.

The group finished 2019 with €738m of net debt (excluding lease liabilities), equivalent to 1.5 times cash profits (Ebitda). But Peel Hunt reckons this will rise to €780m this year and the drop in earnings will push leverage to 3.9 times Ebitda. While the group is typically good at generating free cash flow – there was a 17 per cent increase in 2019 to €172m – the broker projects this will plunge to just €5m this year. Still, TI Fluid Systems had €600m of liquidity at the end of March, having drawn on €146m of its €192m revolving credit facility. This gave it confidence to keep its final 5.94ȼ dividend, a move that attracted criticism amid its furloughing of workers and salary cuts. The payout was voted down at the annual meeting by Bain Capital, which owns a 54 per cent stake – the private equity giant concluded “it is not the right time to issue a dividend”.