Faurecia – Cutting our Trading Short -7.5% ABS, -1.8% REL

*Selling flow did not outweigh the strength in the market over the last couple of weeks

*Our short thesis was based on our expectations that we would see 1/3 of the STLA’s stake distribution going to holders who would not wish to hold a small stake in a relatively small European listed company with no ADR listing

*We are cutting it relatively quick despite the US holders only having gotten their allocations on Thursday last week as we on the medium term see EO FP as a undervalued name with a medium term price target of EUR 60 versus the current EUR 48.5

Trading Short: Faurecia – Boring value can’t match STLA love

Friday • 05 March 2021 • 16:57

*STLA announced this morning the timeline for the long awaited distribution of its 39% stake in EO FP

*To distribute 0.017029 ordinary shares of Faurecia; and (ii) Euro 0.096677 for every STLA share held – approx. 54m shares of EO FP

*Short interest in EO FP is currently less than 2m shares

Background

*Back on 15th September the merging companies announced that the distribution of the remainder would be post completion of the merger which meant that arbs that had hedged out this exposure when they set the deal were forced to buy it back which caused quite a bit of buying pressure – we heard somewhere in the range of 20-30m shares

*This pushed EO FP higher following which PSA placed a 7% stake at EUR 31.9 on the 29th October 2020  which caused a sell off but the stock quickly recovered from there – one could argue they were worried about the potential selling pressure when the distribution happens

*As part of this EXOR (14.4%), EFP/FFP (7.19%), Bpifrance (6.18%) and DFG (5.62%) have all agreed on a 6 month lock up post the distribution – according to our calculation they will therefore hold around 13% of EO FP leaving 26% stake being distribute to the remaining shareholders of STLA

*Timeline – AGM 8th March – 15th March and delivered on the 22th March while US holders are expected to get the shares on the 1st April

Thoughts

*While there were a lot of arbs in this name back in September these have all gone out of it leaving EO FP fairly untracked at this point while the overhang has been in the stock for the last 5 months

*With no US trading line we expect that this shareholder base from STLA will be quick in getting rid of their allocation along with some of the wider European players as EO FP is not a component of any of the major indices – although this could change at a later stage now free float market cap will increase

*Based on the latest SEC filing – the pre-merger shareholder base consisted of approx. 24% of US holders (29% for FCA and 18.6% for UG FP)

*ETF outflows should also be decent with STLA being in the MSCI, CAC, FTSEMIB and other indices

*With all the banks pushing STLA as a buy it is likely that a lot of different type of investor with less interest in a company like EO FP will be sellers when they get the allocations

*The recent notes do not seem to have covered much of a view what to do with the EO FP shares – even though BBG ANR shows on EO FP 13 Buys, 5 Holds and 2 Sells with an average price target of EUR 52 leaving a 20% upside

*We continue to like STLA outright so would not want to go short that way

Valuation

*The company argues that the distribution will increase free float, improve its capital market profile and allow EO FP to affirm its business strategy as an independent company

*EO FP remains cheap on a DCF basis – we see around a +40% upside with a price target of EUR 63 and a 20% discount to the peers on multiples – although the main peers are all much bigger players

*While we like EO FP on the potential we would only be a buyer post the outflow as we see potential for EO FP to go back to the PSA placing price around EUR 32 which leaves around a 30% downside from the current levels

Flow

Quick and dirty back of the envelope calculation of selling pressure due to trackers or trackers and US holders is around 18m shares in total which is approx. 1/3rd of the total distribution and implies 18 days of selling

There will be some overlap between US holders and the index trackers but there will also be additional institutional and retail holders of STLA who are not interested in their EO FP distribution

Conclusion

*We are looking to short around the current levels with a target of around EUR 32 as this is a big support level

*Post the outflows we would look to reverse to a long as we see a lot of value within EO FP and will at that point trade very cheap  – we have a medium term pt for EO FP of EUR 60+