NNBR: NN Inc. new business wins and increasing free cash flow supports price target of $7.00 per share.
NASDAQ:NNBR
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On January 9, 2024, the NN Inc. (NASDAQ:NNBR) announced they had a record breaking level of new business wins in 2023 totaling $62.6 million. The company ended 2023 on a strong note as the acceleration in new business wins was a direct result of the company’s new transformational business strategy.
The company’s $62.6 million in new business wins during 2023 included wins in three key areas:
1) Electric vehicle (EV) and hybrid vehicle applications with total wins of approximately $30 million.
2) Vehicle connector components and electrical connector shielding with total wins of approximately $15 million.
3) Diesel parts for large equipment with total awards of approximately $9 million.
Precision components supplied by the company are proving valuable in supporting advancements in noise reduction, vibration reduction and harshness performance requirements by manufacturers. Its capabilities in precision machining, precision stamping, plating, precious metals and injection molding are accepted in the marketplace, especially with certifications such as ISO-13485, ITAR, IATF-16949, ISO-9001, NADCAP AC7108 & AC7004. These certifications and internal capabilities have allowed NN to immediately re-enter the medical business with a focused agenda on surgical instruments, handpieces and implants for orthopedic applications, among others.
NN delivers single micron tolerance with its precision machining capabilities in Swiss-style, screw, and rotary transfer machines with worm milling and gear hobbing. Its micro milling and grinding are ideal for component needs such as motor shafts, pinion and worm gears, connectors, injector and spool valve components and armatures. The company has progressive stamping capabilities with presses from two to 330 tons and specialized knowledge in producing high and low voltage connectors, electrical contacts and contact assemblies, including EMI connector box shields, bus bars and collector plates. These components are needed in EVs, hybrid vehicles, battery storage, meters and power distribution systems.
NN’s pipeline of new business opportunities entering 2024 is approximately $500 million in size. The company continues to evolve and strengthen its growth programs by focusing on specific product applications including electric steering systems, electrical systems, braking systems, electricity distribution, battery management, fluid management, EV charging systems and medical components.
CEO Harold Bevis stated, “The NN sales team did a great job in 2023. Our sales growth goal is 5% CAGR, and this level of new business wins is consistent with our objectives and shows that the actions we have in place can deliver tremendous forward value. Coupled with our revamped approach to operational performance, the company intends for these new business wins to be additive as we increase our customer retention rates on existing business.”
New Investor Presentation
The company released an updated investor presentation on January 18, 2024, in conjunction with an analyst conference. The investor presentation can be found here.
Updated Long-Term Financial Goals
In the investor presentation, the company updated long-term financial goals. The company now expects revenues to exceed $650 million in 2028 and organic revenue growth of 4%-5% on an annualized basis. Adjusted EBITDA margins are expected to increase to the range of 11%-12%. Strategic acquisitions are expected to occur over that 4-5 year time frame.
The company plans to increase new business wins annually in the range of $50-$70 million, which is in line with the $62.6 million recorded in 2023. Free cash flow conversion is expected to exceed 50% of EBITDA driven by ongoing cost management, reduction in interest expense, and the use of existing NOLs to lower cash taxes.
Transformation Initiatives
The company is undergoing a series of strategic initiatives in order to grow sales, improve margins, and increase free cash flow generation that should increase shareholder value over time. These include five key components:
1. Strengthening Leadership and Accountability – The company recently hired a new COO, Tim French, and a new Chief Procurement Officer, David Harrison. Both have extensive business experience and transformation leadership. Headcount has also been reduced in underperforming areas.
2. Address Unprofitable Business – The company has begun the process of exiting unprofitable contracts and continues to assess the efficiency and capabilities of its global manufacturing footprint. The goal is to improve plant level EBITDA by over $10 million annually. The company has also engaged in cost-out and asset management improvements at the plant level, with established quarterly or monthly targets.
3. Expand Margins – The company has implemented many cost cutting measures and price increase initiatives and is rolling out a new Total Cost Productivity program on a global basis. The goal is to offset inflation and expand operating margins.
4. Institutionalize Free Cash Flow Generation – The company is refocusing its global culture around better business practices by balancing cash inflows with outflows. The company was free cash flow positive in the last two quarters and for the trailing twelve months. This is primarily driven by base business results, reinvestment rates, and high cost cap structure.
5. Increase Business Wins – The company is trying to balance wins between Power and Mobile Segments and within Mobile, across ICE, EV, and Hybrid vehicles. The company is aligning the sales organization between people, products and a stronger focus.
Valuation & Summary
We are increasing our DCF based price target to $7.00 per share based on the company’s updated long-term goals of revenues exceeding $650 million in 2028 and obtaining adjusted EBITDA margins to the 12%-13% range. We also lower our DCF discount rate to account for likely de-risking of the overall story.
We believe NN can be an active participant in four growing and attractive markets:
1) Automotive Parts & Passenger Vehicles – Although modest market growth is expected in 2024, long-term growth is expected to overcome a weaker economic outlook which historically prompts contractions in light vehicle (LV) output. A more normalized supply-side & vehicle pricing strategy is expected to provide further support this year. In addition, the China markets may provide incremental long-term growth opportunities.
2) Commercial Vehicles – The global heavy-duty truck market is estimated to be 3.1 million units in 2023. The heavy-duty commercial vehicle sector is expected to continue to grow annually and may deliver a CAGR of 3.3%, reaching 3.7 million units by 2028. In addition, engine advancements focused on emission reduction and enhanced vehicle functions may provide additional opportunities.
3) Grid & Electrical Investment – The global power grid market expected to grow at a CAGR of 4.37% through 2032. This is driven by the growing energy needs from residential and industrial usage, the ongoing shift towards renewable energy sources, and the adoption of new related technologies.
4) Medical Components - Orthopedic sales are expected to increase 3.4% for 2023 and 3.4%–3.7% year-over-year through 2026. Procedure volumes in most product segments and geographic regions have normalized since COVID-19 which had reduced the availability of elective procedures. While there may be pockets of backlogged procedures that produce a market demand tailwind, this anticipated upside may be partially offset by staffing shortages.
We do not believe the market is recognizing the future margin enhancement and strong free cash flow generation that will likely occur going forward. The company is expected to continue to have success in new business wins which will provide a stable growth platform in the future. The company has a focused plan for cost reduction and sales improvement that has already taken hold in 2023 and will continue into 2024 and beyond.
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