Constellium: A Discounted Play On Secular Aluminum Tailwinds – Seeking Alpha

Raw Aluminum Sheets

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Constellium SE (NYSE:CSTM) operates as a downstream aluminum producer primarily serving the aerospace, automotive, and packaging markets globally. Unlike many other cyclical names, CSTM benefits from long-term contracts and sticky business relationships, allowing it to outperform through the cycles. Plus, CSTM’s end markets are not as commoditized as you might think, given its exposure to growth in the automotive and packaging market niches. CSTM is a beneficiary of aluminum can sheet gaining share from plastics in packaging, while in autos, the long-term trend toward light-weighting should continue to benefit CSTM as well. While CSTM will go through another reinvestment cycle in the coming years, the solid project-level IRRs should yield a normalized post-2025 FCF of >€300m, implying a compelling ~14% FCF yield at these levels.

Compelling Growth Potential in Autos Amid Secular Light Weighting/EV Trend

CSTM’s updated EBITDA bridge to 2025 has seen another upward revision, with most of the delta split between an operating leverage recovery in the auto and aerospace end-markets, as well as growth capex IRR (>30% for brownfields). The ~€80m of cyclical tailwinds in auto/aero stands out as particularly conservative in the current post-COVID environment, given this is well below the pre-COVID baseline (aerospace was running at ~€100m in 2019). Plus, the numbers assume automotive continues to run well below potential at an 80-85% capacity factor despite a likely temporary chip shortage impact.

Even if a cyclical upswing fails to materialize, the pending EV transition could support further upward revisions – per CSTM, >70% of autos will become EV-centric by 2025 (up from ~40% today), implying ample margin accretion given the higher aluminum content in EVs.

Globally, aluminum also continues to take share within automobiles due to its lightweight properties relative to steel – this boosts fuel efficiency and helps manufacturers satisfy CAFÉ regulatory standards in the US. As environmental and emission regulations tighten in the US and EU, expect this trend to accelerate. Thus, I feel comfortable underwriting steady growth throughout the entire auto value chain, with CSTM guiding toward an auto body sheet volume CAGR at ~14% for US/EU and auto extrusions CAGR at ~11%.

Constellium EBITDA Bridge 2025

Constellium

TID Could Kickstart Further Upside in Aerospace & Transportation

The Aerospace & Transportation (A&T) segment should be a natural beneficiary of a post-COVID recovery in aerospace demand, with the TID (Transportation, Industry, and Defense) portion of the segment, which CSTM pivoted towards during the pandemic, likely to lead the way. In particular, the ~€80m earmarked for TID/can market growth and capex harvest appears conservative, given TID still has material re-pricing leverage ahead. Note that TID has ~70% of volumes tied to multi-year contracts, and assuming its pricing power holds, fully re-pricing all vintages in-line with producer inflation (PPI) should result in material upside. Ongoing geopolitical tensions are less of a concern, as sales to Russia/Ukraine are minimal, although the company does procure ~4% of its metal input from Russian suppliers. That said, there is a silver lining here, as the Ukraine invasion could accelerate European defense spending. This trend is already playing out – Boeing’s (BA) 737 deliveries in March equates to the most deliveries in a single month since regulators lifted the grounding in late-2020.

Boeing Deliveries

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FCF Generation Intact Through the Upcoming Capex Cycle

Through 2025, CSTM’s FCF generation will be weighed down by a doubling in its growth capex to €150m/year for brownfield opportunities. That said, the growth capital spend (primarily focused on beverage can sheet and recycling) comes with very compelling economics – paybacks from first production are 4-5 years, and implied EV/EBITDA multiples stand at 3.0- 3.5x. A key reason for this is the lower capital outlay for brownfield expansion – CSTM will spend 3-5x less than greenfield investment on a per ton basis, with ~€130m allocated to the recycling facility and ~€200m for a 200kt brownfield can sheet expansion.

Over time, the benefits from growth projects should drive increased EBITDA, and as the growth capex phases out, FCF should inflect higher. Beyond 2025, annual growth capex will run in a normalized €75-150m range and assuming management is reasonable with maintenance capex at €200m, there is a clear path toward a normalized >€300m FCF run-rate (~14% FCF yield). Worth noting, however, is that the guidance numbers do not account for balance sheet optionality – assuming CSTM continues to de-lever ~0.5x annually, the long-term 1.5x-2.5x leverage target is well within reach. Given that management has expressed willingness to accelerate capital return (mainly buybacks) or potentially pursue bolt-on acquisitions in recycling, I suspect the current EPS guidance could prove very conservative.

Constellium FCF Targets

Constellium

A Discounted Play on Secular Aluminum Tailwinds

CSTM is uniquely positioned, as one of four U.S.-based auto body sheet producers (Novelis (a subsidiary of Hindalco Industries (OTC:HNDNF)), Arconic Corporation (ARNC), and Aleris (now a subsidiary of Novelis)), for significant growth over the coming years, as demand for aluminum solutions inflects upward amid the vehicle light-weighting trend. Rising raw material costs and supply chain disruptions are near-term headwinds, but CSTM offers many positives, including favorable exposure to secular trends in packaging and automotive, along with the management team’s consistent operational execution and deleveraging efforts.

Looking beyond the current reinvestment cycle, CSTM has a clear path to generating €850m in EBITDA by 2025 via organic growth execution, additional productivity, price tailwinds, and recycling benefits. Net against the updated capex guidance, this should allow for a more normalized mid-term FCF at >€300m (implying an attractive ~14% FCF yield). Thus, I expect a valuation re-rating over time as CSTM successfully works through its capex cycle and continues to de-lever the balance sheet.

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