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Morningstar | Adient Stops Dividend, but We Still See Its Problems as Fixable

Adient's fourth-quarter fiscal 2018 results report Nov. 9 were not different from what it preannounced on Oct. 19, but the stock fell 25% because the company announced the dividend will be suspended starting in the second quarter of fiscal 2019. We are not changing our fair value estimate as our investment thesis has not changed and dividends are not part of our free cash flow calculation, but we may have fair value adjustments later this month after incorporating the 10-K details into our model. We don't feel the company had to stop the dividend, but doing so frees up about $100 million annually of cash to restructure or reduce debt and shows stakeholders management is willing to do whatever it takes to right the ship. We do not expect resumption of the dividend for at least a year, and management said they'd resume it once the operational problems (launch difficulties) are fixed.

We expect the stock will remain undervalued for at least a few more quarters because we think market sentiment on this name will remain negative until new president and CEO Doug DelGrosso shows a meaningful turnaround in operations. He is only 40 days into the job so he needs more time to assess all the operations. Management will not give fiscal 2019 guidance until January but did say that fiscal 2018 problems will continue to have a significant impact in fiscal 2019. This ongoing headwind is likely why Adient received relief on its bank adjusted net leverage ratio covenant to 4.5 times from 3.5 times. The ratio at Sept. 30 was just over 3.0. The fiscal 2019 expectation is not good news but also not surprising because we did not expect a fast turnaround. We are encouraged to hear DelGrosso say Adient's problems are isolated to a handful of plants rather than companywide and the problems are nothing he has not seen before in over two decades in seating at Lear. We see things as very bad at Adient, but we do think they will eventually get better once the firm gets back to basics.

Net debt at year-end was $2.74 billion, or 2.29 times adjusted EBITDA, compared with $2.77 billion, or 1.73 times adjusted EBITDA at year-end fiscal 2017. Cash at the end of fiscal 2018 is not vastly different either at about $700 million. Nearly all of Adient's $3.4 billion of debt is due in 2021, 2024, and 2026. In addition to cash, liquidity comes from a EUR 200 million accounts receivable factoring facility, which contributed $142 million of free cash flow in fiscal 2018 and is likely well over half funded at year-end. Further liquidity comes from an unused $1.5 billion credit line expiring in July 2021. Institutional clients wanting more detail on Adient's operational problems and its potential upside should read our June 28 report, "Narrow Moat Adient Trading as if It Will Never Get Better."