Automodular has recently provided an update regarding the Ford contract and the termination of its Oakville operations. It looks like Ford has decided to fund Automodular’s Oakville facility exit costs which management recently stated would amount to roughly $8 million. Also, Automodular will continue to provide sub-assembly and sequencing services for Ford until December 23, 2014.
What does this mean to our original thesis?
1) Originally we assumed $6 million in total exit costs in our liquidation value. Now that Ford has decided to pay for these costs, we can now add this $6 million back as additional upside to our liquidation value.
2) We were also conservative in our free cash flow estimates by assuming that the company would only generate $3 million in FCF per quarter and zero free cash flow in Q4 2013. It looks like the latter will not be the case as the contract with Ford has been extended to December 23, 2014. We can now safely assume that Automodular should generate an additional ~$1.5-2 million in free cash flow above our original projections.
Our original conservative estimate of net liquidation value was ~$53 million. With this recent update, we should expect a figure closer to $60 million, implying a per share value of $3.00 CAD.
As mentioned in our original Automodular write-up https://oraclefromomaha.wordpress.com/2013/06/06/automodular-a-liquidation-play/, we think management’s track record in allocating capital has been rather good.
1) They continue to return cash to shareholders via paying a regular dividend and buying back shares at what we believe to be attractive levels.
2) Management is also continuing to focus on securing a new contract or expanding into a new business opportunity over winding up the business. Given that there is still a full year left until the Ford contract expires, we believe this is a logical step. If newly acquired contracts are accretive to shareholder value, then we as shareholders would more than welcome that.
Although we do acknowledge that management’s jobs are at stake, we are reasonably confident that they will not pursue a value-destroying transaction, and their solid track record supports this view. Management does not hold a ton of stock, but they have been active buyers ever since Ford announced the contract cancellation. With that said, I do not know of many suitable acquisition targets that may fit well with Automodular’s sequencing and subassembly focus and I think the best case scenario is that they will get offered another contract with Vesta or another local renewable energy company.
Overall, we think Automodular remains an attractive liquidation play, and as our thesis continues to play out, we believe it’s reasonable to expect a much higher share price one year from now if the company undergoes liquidation. Also keep in mind that there is still the bonus free option of a favourable settlement with GM.
Disclosure: The Authors are long shares of Automodular.