TI Fluid shares plunge on China market warning
Shares in TI Fluid Systems fell sharply on Wednesday as the company said sales in China had been hit in the fourth quarter due to Covid restrictions and a switch to electric vehicles in the country.
The manufacturer of automotive fluid storage systems for light vehicles said 2022 revenue is expected to be around €3.26bn, up 10% year on year.
However, it warned that group constant currency revenue growth was expected to 100 basis points behind global light vehicle production (GLVP) growth due to the rapid transition of domestic Chinese original equipment manufacturers (OEM) to electric vehicles "which presents a short term mix issue for the group in that market".
TI Fluid also said that it faced a "material" non-cash impairment charge due to lower GLVP forecasts as well as the rising interest/discount rate outlook meaning it would have to review the carrying value of some fixed and intangible assets.
"The group did experience an unexpected negative sales impact in China during Q4 primarily due to the government's Covid policy changes which caused unexpected production shutdowns," the company said in a trading statement.
"Whilst inflationary headwinds have continued, the group has made good progress on managing ongoing cost increases, with cost recoveries from OEM customers in 2022 in line with management expectations at about 70%. The group expects to report adjusted EBIT for the full year of circa €180m," TI Fluid said.
"Whilst market conditions, particularly in China, are expected to remain challenging in the short term, the group's strong market position, product leadership and clear strategy leave it well positioned to deliver on its long-term objectives," the company said.
Progress on battery electric vehicle (BEV) business awards continued in the final quarter of the year, with a further €0.4bn lifetime revenue booked, bringing the total to €1.3bn for the full year. Bookings for hybrid electric vehicles (HEVs) for the year were also €1.3bn, with €0.3bn in Q4.
Analysts at Jefferies said that the shares remained a 'buy' despite concerns about the challenges posed by recent supply chain difficulties in China presenting some risk to the group's prior 2022 sales and EBITA guidance.
"However, while we acknowledge that even a minor disappointment from TIFS will likely not be taken well by the market at this stage, we reiterate our positive stance on the stock, and see a better FY23F ahead," they wrote in a note to clients.
"Despite industry volume recovery likely to be lower than expected, strong EV bookings should start meaningfully converting to sales, in our view, supporting market outperformance, and the CMD in Germany in April will be an important catalyst, providing some long-awaited detail on the group's EV strategy."
"Cost pressures (excluding labour) are generally easing, and we hope to see some good progress on cost recovery having been made in the fourth quarter, supporting margin recovery into 2023. The stock remains very cheap relative to peers, having not participated in the recent cyclicals rally, and while the 2023 recovery may not be as pronounced as once hoped, we believe there is potential for the stock to significantly re-rate once there are even modest signs of improvement in margins and volumes."
Reporting by Frank Prenesti for Sharecast.com