AUTOMODULAR UPDATE

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.

3 thoughts on “AUTOMODULAR UPDATE

  1. Sjoerd says:

    On what information are you basing your view that Ford will pick up the tap for AM’s closing cost?

    AM’s press release it states ‘….Ford has provided certain production and price related assurances and will fund Automodular’s incremental closure costs related to this extension. …’

    So it says INCREMENTAL closure cost and not the full closure cost.

    Besides this note I agree with your write up and like your write up of LINTA. Keep up the good work

    Regards,

    Sjoerd

  2. Ford is not picking up the $6mm in closing costs AM has guided toward. They are only assuming a large percentage of incremental closing costs that will be incurred by Automodular closing in Dec, not June.

    A $3.00 target seems quite on the high end given a variety of factors which will inevitably impact operating performance next year. How well management works to mitigate these negatives will determine if this $6mm functionally rises (though costs will likely be built into operating performance) but this number is very unlikely to decrease materially beyond guidance.

  3. Thank you both for your comments. Both of you are right, we must have not been drinking our coffee when this post came out!
    However, we still think a $2.50-260 liquidation value range is reasonable without pricing in potential upside from the conclusion of the GM litigation.

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