After the market close on June 30, 2015, TriMas Corp (NASDAQ:TRS) will spin-off its towing, trailering, cargo management and other related accessory products business (formally known as Cequent) to current shareholders. The new company will be renamed Horizon Global Corporation and will dramatically reshape TRS’s income statement and balance sheet, resulting in positive re-rating of its shares.
TRS is a global designer, manufacturer and distributor of engineered and applied products for commercial, industrial and consumer markets. The Company has four primary business segments:
- Packaging: Packaging is a designer, manufacturer and distributor of specialty, highly-engineered closure and dispensing systems for a range of end markets, including steel and plastic industrial and consumer packaging applications. This segment generated $337.7 million in net sales and $77.9 million in operating profit (adjusted for special items, the segment had an operating profit margin of 23.9%) in 2014.
- Energy: Energy is a manufacturer and distributor of metallic and non-metallic gaskets, bolts, industrial fasteners and specialty products for the petroleum refining, petrochemical, oil field and industrial markets. This segment generated $206.7 million in net sales and $6.7 million in operating loss (adjusted for special items, the segment had an operating profit margin of 3.1%) in 2014.
- Aerospace: Aerospace is a designer and manufacturer of a diverse range of products for use in focused markets within the aerospace industry. Aerospace’s products are highly-engineered, customer-specific items that are sold into focused markets with few competitors. This segment generated $121.5 million in net sales and $17.8 million in operating profit (adjusted for special items, the segment had an operating profit margin of 15.2%) in 2014.
- Engineered Components: Engineered Components is a designer, manufacturer and distributor of high-pressure and low-pressure cylinders for the transportation, storage and dispensing of compressed gases, as well as a variety of natural gas powered engines and parts, gas compressors, gas production equipment, meter runs, engine electronics and chemical pumps all engineered for use in oil and natural gas production. This segment generated $221.4 million in net sales and $34.1 million in operating profit (adjusted for special items, the segment had an operating profit margin of 15.4%) in 2014.
In 2014 these four segments contributed 59% of total sales and ~75% in adjusted operating profit for the entire company.
The Company looks to ensure that its business segments share important characteristics, including leading market positions, strong brand names, broad product offerings in focused markets, established distribution networks, relatively high operating margins, relatively low capital investment requirements and both organic and acquisition growth opportunities.
Management deploys its TriMas Operating Model, which provides consistency across all business segments, in order to execute its growth and productivity initiatives and allocate capital and resources.
The Company expects that the spin-off will allow both companies to [i] improve margins, [ii] allocate resources more efficiently, [iii]provide better compensation incentives for employees; and [iv]improve financial flexibility to improve growth opportunities.
TRS shareholders will receive two shares of HZN for every five shares owned of TRS. As such, New-TRS will have 45.4 million shares and HZN will have ~18.1 million shares.
Additionally, HZN will obtain a term loan of $200 million (at an expected interest rate of LIBOR + 6%) and make a one-time dividend payment to TRS in that amount.
The spin-off of HZN will have a dramatic impact on TRS’s balance sheet and income statement.
Balance Sheet: Aided by the $200 million dividend coming from HZN, TRS’s net debt falls from ~$650 million to ~$450 million, which reduces the Company’s leverage (net debt/EBITDA falls from 3.6x to 2.8x). The lower leverage will enable the Company to initiate a dividend for the first time (which has the added benefit of bringing in additional shareholders), as well as make accretive acquisitions.
Income Statement: The Company’s Cequent business has historically been a drag on margins. Over the past three years, excluding corporate expenses, the “New TRS” business margins have averaged 15.9% vs. 5.9% for HZN. As such, operating margin (including corporate expenses) has averaged 9% over the past three years for TRS, trailing peers. With the lower margin Cequent business off the books, TRS should be able to show greater profitability, which should result in shares trading in-line with comps.
Guidance of overall sales growth of 6 – 8% CAGR and segment operating profit of 14 – 16% by 2018 should improve profitability significantly over the coming years.
Additionally, the Company has stated that in addition to its newly initiated dividend, management may look to spend available cash on share repurchases, which would increase EPS.
Lastly, management will also look to do accretive acquisitions as long as hurdle criteria (e.g. ROIC > WACC, Return on Net Tangible Assets > 25% and, operating profit margin exceeds 15%), which will be beneficial to the bottom and top line.
The primary concern is that management will be unable to execute and reach its performance targets. In particular, the Energy segment is facing headwinds due to the impact of lower oil prices on upstream customers. While global oil prices have stabilized for the current time (prices of WTI have traded between $57 and $61 per barrel since late-April), it might take more time for the industry to return to previous levels of capital spending, which will weigh on TRS. Similar margin concerns exist within the Aerospace segment as the Company has experienced distributor de-stocking and consolidation within the industry.
Additionally, the Company earns approximately 30% of its revenues internationally, which, given the strength of the U.S. Dollar, will hurt sales growth as sales abroad are translated into USD at prevailing exchange rates.
Lastly, the Company is subject to general macroeconomic conditions. Any slowdown in the global economic recovery may negatively impact results.
Valuation – $35 (~20% upside)
Using guidance provided by management, we estimate 2015 EPS for both TRS and HZN.
The upcoming spin-off of TriMas’s lower margin business should result in a positive re-rating of the shares. “New TRS” will have better margins, faster growth and will initiate a quarterly dividend. Additionally, management focus on improving margins, making accretive acquisitions and deploying shareholder friendly capital allocation strategies, will improve the overall profile of TRS. Buying TRS shares provides an opportunity to own a high quality company going through a very positive transformation that is trading at a cheap valuation. The upside is attractive and the cheap valuation (13.7x PE) provides a margin of safety.
Don’t be too late to the party – Click Here to see what 4500 Wall Street Analysts say about your stocks.