ADNT - Valens Credit Report - 2019 10 16
Cash bond markets are grossly overstating ADNT's credit risk with a YTW of 7.373% relative to an Intrinsic CDS of 253bps and an Intrinsic YTW of 2.193%. Additionally, Moody's is materially overstating ADNT's fundamental credit risk, with their highly speculative B2 credit rating seven notches lower than Valens' IG4+ (Baa1) ratingIncentives Dictate Behaviorâ„¢ analysis highlights mixed signals for creditors. ADNT's compensation framework should drive management to focus on all three value drivers: asset utilization, margin expansion, and top-line growth, which should lead to Uniform ROA improvement and increased cash flows available for servicing obligations going forward. In addition, management has low change-incontrol compensation relative to their average annual compensation, indicating they are unlikely to pursue a sale or buyout of the firm, reducing event risk
ADNT currently trades at a material discount relative to UAFRS-based (Uniform) Assets, with a 0.6x Uniform P/B (V/A'). At these levels, the market is pricing in expectations for Uniform ROA to fall from 4% in 2018 to 3% through 2023, accompanied by 1% Uniform Asset growth going forward. Given that valuations are likely being compressed by the market's inaccurate perception of the firm's credit risk, ADNT could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement. Moreover, at current levels, equity downside is likely limited, as asset values begin to offer a floor to valuations at these levels
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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