DBRS Upgrades Magna International Inc. to A (low) / R-1 (low), Trend Now Stable
Autos & Auto SuppliersDBRS has upgraded the Senior Debt rating of Magna International Inc. (Magna or the Company) to A (low) from BBB (high). Magna’s Commercial Paper rating has also been upgraded to R-1 (low) from R-2 (high). The trend on the ratings has been changed to Stable from Positive. The rating action reflects the ongoing improvement in the Company’s financial performance, which has effectively exceeded historical norms and is now attaining record levels. DBRS notes that Magna has generated strong results amid industry volumes that, while higher year-over-year, persist at levels well below historical norms, particularly in major developed markets such as North America and Europe.
The ratings action recognizes Magna’s strong business profile as a global leading Tier 1 automotive supplier whose operations are progressively becoming more diversified by customer, geography and vehicle segment. Additionally, Magna’s financial profile continues to be robust as a result of its consistently conservative financial policy. The Company’s operating performance has recovered from the previous weaker levels experienced during the severe industry downturn induced by the global financial crisis of 2008-2009. While the European market faces considerable uncertainty over the near- to medium-term, DBRS notes that the significant majority of Magna’s profits are sourced in North America. Moreover, the majority of the Company’s European revenues are with customers such as Daimler AG, BMW AG and Volkswagen AG, thereby somewhat mitigating Magna’s European exposure given these companies’ relative strength in Germany, in addition to their material exports to other regions, including North America and Asia.
Magna’s 2011 financial results improved vis-à-vis 2010. Operating income was solid at $1.2 billion, reflective of higher production volumes in all of Magna’s geographic market segments, although earnings continue to be somewhat undermined by ongoing inefficiencies at certain exteriors and interiors system facilities in Europe.
In North America, production volumes through 2011 increased by 10% from 2010 levels. Production volumes also increased in Western Europe (albeit at a more moderate rate of 3% over 2010), with regional market conditions deteriorating significantly in the second half of the year. While a protracted process, the Company continued to make further progress regarding the diversification of its revenue base, with its Rest of World production sales increasing by 61% year-over-year and attaining a record level of $1.4 billion (although this still represents less than 5% of total sales). Magna also established two new joint ventures with Chinese partners to better position the Company to various Chinese auto manufacturers.
DBRS notes that the Company’s credit metrics are very solid, readily exceeding levels commensurate with the assigned ratings, due significantly to Magna’s balance sheet given nominal leverage and a solid net cash position in excess of $1.3 billion. Magna’s strong financial profile enabled it to sustain investments through the recent economic downturn. Capital expenditures in 2011 were up by a very substantial 66% relative to the prior year, with the Company looking to further increase its diversification efforts, given significant investments in markets such as China, Brazil, Russia and India (BRIC). Magna made acquisitions last year, although the aggregate amount was modest at approximately $120 million, and readily absorbed by its strong balance sheet.
Going forward, DBRS expects the Company’s profitability to remain solid in 2012. Based on Magna’s outlook, DBRS anticipates that the Company’s operating earnings will be moderately higher year-over-year, with projected negative mix effects and the cost of new greenfield facilities representing partial offsets to the earnings impact of further revenue growth. Production volumes in North America are expected to increase further this year relative to 2011, as sales volumes continue to progressively grow (albeit while still remaining below historical norms prior to the global economic downturn of 2008-2009). However, in Europe, production volumes are expected to contract in line with ongoing economic headwinds in the region associated with the fiscal challenges of various Eurozone member nations. Rest of World production sales, while still representing a minor portion of total revenues and earnings, are forecast to increase further in 2012, with Magna remaining firmly committed to geographic diversification. To this end, capital expenditures in 2012 are projected by the Company to increase further (vis-à-vis the already elevated levels of 2011), to approximately $1.5 billion, with a significant amount of this investment to be allocated toward new facilities and expanding Magna’s Rest of World production capacity. DBRS notes that these increased investments will be sufficiently offset by Magna’s operating cash flow, with the Company expected to generate positive free cash flow this coming year.
The Company will continue to look at acquisitions. DBRS notes that Magna would potentially consider a significantly larger acquisition than recently closed transactions. The supply base in Europe would appear to present several acquisition opportunities, given significant overcapacity at the industry level exacerbated by considerable economic headwinds in the region. Magna is a potential consolidator in light of its scale, diversified operations and strong balance sheet. The Company has the capacity to execute a meaningful debt-financed acquisition (i.e., such that its total debt-to-total capitalization ratio would not materially exceed 30%) without impacting the rating; DBRS expects Magna to continue adhering to a conservative financial policy when considering further acquisitions.
Apart from the current weakness in the European automotive industry, prospects for the Company’s other markets are positive over the near- to medium-term, supporting a stable outlook for the ratings. However, DBRS notes that should Magna pursue a large-scale acquisition, whereby the Company’s indebtedness would substantially increase, would potentially trigger an event-driven review of the ratings.
Note:
All figures are in U.S. dollars unless otherwise indicated.
The applicable methodology is Rating Automotive Suppliers, which can be found on our website under Methodologies.
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