DBRS Confirms Magna International Inc. at A (low) and R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Debt rating of Magna International Inc. (Magna or the Company) at A (low) and the Short-Term Debt at R-1 (low), recognizing the Company’s solid business profile as a global leading Tier 1 auto supplier. Moreover, Magna’s financial profile, despite becoming slightly less conservative given its revised capital structure, remains well commensurate with the ratings. The trends on all ratings are Stable, as DBRS expects the Company’s performance over the near to medium term to remain solid amid rather favourable industry conditions (notwithstanding headwinds across certain regional markets).

Magna’s financial performance in recent years has been strong, with 2014 sales, net income and operating cash flow attaining record levels for the third consecutive year. Through Q1 2015, performance trended similarly, although sales and earnings were slightly adversely affected by foreign exchange headwinds (mostly the relative strengthening of the U.S. dollar).

The Company continues to pursue acquisitions and divestitures as Magna progressively refines its product portfolio. DBRS notes that recently completed or announced divestitures have been quite significant, including the sale of the Company’s battery pack business (for approximately $120 million) as well as an announced agreement regarding the sale (expected to close in Q3 2015) of substantially all of Magna’s interiors business (excluding seating) for approximately $525 million. With the interiors sale, Magna has effectively removed a drag (albeit slight given the Company’s considerable scale and product diversification) on earnings performance, as that business has been underperforming for several years.

Accordingly, margins in Magna’s European segment are expected to moderately benefit, with the Company projecting the segment EBIT margin to be in the low 4% range this year and increase further to a range between 4.75% and 5.25% for 2016, (representing a considerable improvement from losses/weak margins generated in 2011 and immediate subsequent years). DBRS notes that Magna is making progress in its geographic diversification, with sales in Asia being subject to ongoing increases; this is significant as emerging markets are expected to represent the majority of global automotive growth over the long term. However, for the time being, North America continues to represent the significant majority of sales and earnings, with this geographic segment in 2014 accounting for 54% and 77% of total sales and EBIT, respectively.

The Stable trends reflect DBRS’s assessment that Magna’s solid financial performance should persist, with the Company being very well positioned to benefit from the ongoing consolidation of the automotive supply base as well as the increasing relative prominence of global vehicle platforms. While the Company’s indebtedness remains subject to moderate increases in line with Magna’s revised capital structure, with the debt (adjusted for operating leases)-to-EBITDA ratio targeted within the range of 1.0 times (x) to 1.5x by year-end 2015, DBRS notes that this range remains consistent with the ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Automotive Supplier Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.