On Tuesday, Citi revised its price target for Forvia SE (FRVIA:FP) shares, a company listed on the Euronext Paris stock exchange, to €12.80, down from the previous target of €20.00. Despite the significant reduction, Citi retained a Buy rating on the stock.
Forvia SE, which had issued a warning a few weeks prior, pointed to several challenges in the auto industry that impacted its financial outlook. The company noted a sharp decline in global S&P production forecasts by 2 million units for the fiscal year 2024, representing a 2.5% drop.
This decrease, along with a slowdown in vehicle electrification, delays in the start of production (SOP) for new models, and slower growth in the Chinese market, has led to a revised revenue projection.
The revised revenue forecast for Forvia now stands at €26.8 billion to €27.2 billion, which is a decrease of €1 billion at the midpoint. Additionally, the company adjusted its expected adjusted operating margin to between 5.0% and 5.3%, a decrease from the previous 6.0% midpoint target.
Free cash flow (FCF) expectations were also modified, with projections now set at €550 million or higher. Moreover, the net debt to EBITDA ratio is anticipated to be less than or equal to 2.0 times, compared to the former estimate of 1.9 times.
The company's profitability, as measured by EBIT, and its free cash flow are highly sensitive to changes in vehicle production volumes. The analyst from Citi highlighted that a roughly 30% drop-through in EBIT is assumed based on the projected shortfall in revenue. This sensitivity to production volume also leads to significant variability in the discounted cash flow (DCF) valuation of Forvia.
In summary, Forvia SE is navigating through a period marked by various industry-wide challenges, including production adjustments and potential labor disruptions, which have necessitated a revision of financial forecasts and affected the company's stock valuation.
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