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Rating action

Scope Rating GmbH (Scope) has today affirmed the BBB- issuer rating on SAF-HOLLAND SE. The Outlook has been revised to Positive from Stable.

Rating rationale

The affirmation of SAF-HOLLAND's BBB-issuer rating is based on the BBB- business risk profile and the upgraded BBB financial risk profile assessments for SAF-HOLLAND, a leading international manufacturer of chassis-related system components for trailers, trucks and buses. The strongly improving financial risk profile is driving the Positive Outlook, with a noticeable improvement in key credit metrics.

The Swedish braking systems supplier Haldex has been fully consolidated by SAF-HOLLAND since February 2023.

The main support for SAF-HOLLAND’s competitive position is the company’s global or regional leadership in oligopolistic markets protected by high barriers to entry, with top three market positions for key products and systems in North America, Europe, the Middle East and Africa. It also commands a dominant position in India for its trailer axles. With its expanded product portfolio, SAF-HOLLAND is well positioned to serve the needs of the global commercial vehicle industry. In addition, the Group owns one of the largest spare parts and service networks in Europe and North America, which represents a significant barrier to market entry.

SAF HOLLAND’s business diversification has improved thanks to the integration of Haldex. The product range has been extended to include foundation brakes, air controls and electromechanical braking systems, thus covering a wider range of chassis-related components and cementing the Group as a one-stop solution provider. With Haldex accounting for more than 50% of aftermarket sales, the Group has further strengthened its exposure to the highly profitable and resilient aftermarket business to around 31% in 2023.

SAF-HOLLAND’s global geographical reach has also been expanded through Haldex. While the Group remains predominantly active in Europe, the Middle East and Africa (45% of 2023 sales), it has strengthened its presence in the Americas by 4.6 pp to 42% of sales. Despite solid positions in India and Australia, the Group remains underrepresented in large Asian markets such as China, with the Asia-Pacific region accounting for only 13% of sales in 2023.

Key limiting factors for the business risk assessment are the cyclicality of the global commercial vehicle markets and the Group’s relatively modest operating profitability in the context of the automotive suppliers industry, despite the strong performance achieved in 2023.

In 2023, market conditions turned out to be more supportive than expected, especially in EMEA and North America, thus postponing the expected cyclical decline. The enlarged Group outperformed the underlying markets and benefited from a strong order backlog. Including Haldex, revenues increased by 34.6% to EUR 2.1bn, of which 11.4% was organic growth. The company-adjusted EBIT margin increased from 8% in 2022 to 9.6%, well above the original guidance corridor of 7.5% to 8.5%, which was raised three times during the year. This performance was mainly driven by better volumes, higher-than-expected synergies from the faster integration of Haldex, a favourable price-mix and efficiency gains that more than offset cost inflation. As a result SAF-HOLLAND exceeded Scope’s conservative forecasts and achieved a Scope-adjusted EBITDA margin of 11.5%, compared to 9.2% in 2022.

As market conditions are expected to normalise in 2024 after exceptionally high pent-up demand since 2021, both revenues and profitability will be under pressure this year. However, the company has already taken various measures to adjust costs, headcount and production to cope with this cyclical downturn. Despite lower revenues, management expects to limit the earnings decline and targets an adjusted EBIT margin in the 9-9.5% range. Scope expects revenues to decline by 5.5% to around EUR 2bn (including positive consolidation effects) and Scope-adjusted EBITDA to decrease to 11.1%. The agency expects that the ongoing cost measures, combined with the planned productivity gains and further synergies will mitigate the negative impact of lower volumes, higher labour, IT and freight costs.

Assuming a gradual market recovery from 2025, Scope expects revenue growth to resume in 2025-2026 at 4%-4.5%. This revenue recovery, combined with economies of scale, continued efficiency gains and improved aftermarket business, should support a gradual improvement of the Scope-adjusted EBITDA margin towards the level achieved in 2023. Overall, the Scope-adjusted EBITDA margin is now expected to be in the 10-12% range in the coming years, compared to the previous range of 9-10%.

SAF-HOLLAND’s financial risk profile, raised to BBB, is mainly supported by the improved leverage and solid interest cover, but is still constrained by a volatile cash flow cover. All credit metrics have improved in 2023.

Following the debt-financed acquisition of Haldex, Scope-adjusted debt more than doubled in 2022, before declining by more than 10% to EUR 501m in 2023¹. Leverage, as measured by Scope-adjusted debt/EBITDA, improved significantly to 2.1x in 2023 from 3.9x in 2022, reflecting the combined effect of lower financial debt and improved EBITDA. Leverage, as computed by SAF-HOLLAND, came in at 1.8x in 2023 vs 2.6x in 2022, achieving the company's stated goal of reducing reported net debt/EBITDA to below 2x by 2024 one year early. After a slight deterioration in 2024, Scope expects deleveraging to resume with Scope-adjusted debt/EBITDA falling below 2x in 2025-2026.

Debt protection, as measured by Scope-adjusted EBITDA interest cover, has been historically strong, averaging around 12.5x over 2018-2021, As expected, this metric deteriorated sharply in 2023, falling to 7x from 17x in 2022, as a result of higher interest rates. After declining to 6x in 2024, Scope forecasts interest cover to rise above 7x, reflecting the expected decline in EURIBOR base rates and the continued debt reduction.

Due to the volatility of free operating cash flow in recent years, cash flow cover, as measured by Scope-adjusted FOCF/debt² has been the weakest metric for SAF-HOLLAND over the past few years. After bottoming out in 2021, cash flow cover rebounded in 2022 and remained stable at around 18% in 2023. Scope forecasts a slight decline to 13% in 2024, followed by a recovery toward the 20%-30% range in 2025-2026. The Capex ratio is expected to stay around 3% of sales, confirming the asset-light business model. Regarding net working capital, despite the integration of Haldex, which had a net working capital ratio of 20-25% of sales, the net working capital ratio has steadily improved throughout the 2023 financial year, reaching 14.1% at YE 2023. While the management remains committed to a net working capital ratio of 15-16%, there is room for improvement, in particular through a sustained inventory reduction.

Liquidity is considered to be adequate, supported by available liquidity sources including EUR 246m cash on hand at YE 2023 and a EUR 250m committed credit line (91% undrawn), which comfortably covers upcoming maturities.

Supplementary rating drivers are neutral for the issuer rating. Management’s financial policy aims to keep a substantial amount of liquidity available for develeraging, M&A activities or share buybacks. The dividend policy is shareholder-friendly but has remained relatively stable, in line with the stated pay-out ratio target of 40-50%. With regard to M&A, no major acquisition is to be expected beyond opportunistic bolt-on acquisitions. Despite the progress already made, deleveraging remains a priority.

Scope has not identified company-specific ESG factors that could have a material impact on the Group’s creditworthiness. The agency notes, however, that ESG factors relevant for automotive suppliers like SAF-HOLLAND include the need to reduce the environmental impact of products or production, improve resource management (optimised use of energy and natural resources), and enhance supply chain oversight in terms of social standards and responsible sourcing.

Outlook and rating-change drivers

The Outlook revision to Positive from Stable reflects Scope’s expectation that leverage, as measured by Scope-adjusted debt/EBITDA, will move below 2x over the forecast period. The Group will be able to withstand weaker market conditions due to its proactive cost measures, its flexibility potential, further Haldex-related synergies and a more resilient business model supported by a higher aftermarket share. The agency anticipates that SAF-HOLLAND will manage to improve its solid financial risk profile and credit metrics even in a less supportive environment over the next 12-18 months.

Scope would consider an upgrade if SAF-HOLLAND managed to reduce leverage as measured by Scope-adjusted debt/EBITDA to below 2x on a sustained basis, while maintaining an improved free cash flow generation.

The agency could return to a Stable Outlook if SAF-HOLLAND fails to achieve leverage below 2x on a sustained basis. Scope sees further downside should the Group’s leverage, as measured by Scope-adjusted debt/EBITDA, moves above 3x on a sustained basis, or if there is a sustained deterioration in free cash generation or profitability. This could be caused by a significantly weaker business environment, an unforeseen decline in sales or unexpected execution risks related to the merger with Haldex.

1. This sentence was amended on 29 April 2024. In the original publication, the text stated “ declining by 10% to EUR 502m in 2023”.
2. This sentence was amended on 29 April 2024. In the original publication, the text stated “ as measured by Scope-adjusted EBITDA interest cover”.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this Credit Rating and Outlook, (General Corporate Rating Methodology,16 October 2023, European Automotive Suppliers Rating Methodology, 6 February 2024), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating and Outlook were not amended before being issued.

Regulatory disclosures
The Credit Rating and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook are UK-endorsed
Lead analyst: Georges Dieng, Director
Person responsible for approval of the Credit Rating: Thomas Faeh, Executive Director.
The Credit Rating/Outlook was first released by Scope Ratings on 18 April 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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