| Small & micro cap project / Activism insight

Quarterly letter from RF Capital Management: Garrett Motion operates in a duopoly market and enjoys a high ROI; faces indiscriminate selling from institutional investors


by | Dec 13, 2019

Mr. Roger Fan founded RF Capital Management LLC in 2017. The fund invests in 5-10 companies that satisfy three criteria: (a) great businesses (b) excellent management and (c) deep discount to intrinsic value.

In the latest investor letter, Roger Fan explained his rationale behind adding Garrett Motion (GTX, M. Cap: $760 million) to the portfolio.

Garrett Motion is an automotive supplier that makes turbochargers, electric boosting technology, and automotive software. Long-term customer relationships include Ford, Volkswagen, Daimler, BMW, Hyundai, Renault, and Caterpillar.

GTX was spun out of Honeywell in 2018. Spinoff dynamics led to a lot of selling, especially since GTX is too small for many institutions to own.

GTX is not your typical auto supplier. GTX essentially operates as a duopoly in the turbocharger market with BorgWarner.

GTX is also at the top of the auto supplier chain, with an 80% variable cost structure. In the event of a downturn, we believe GTX will perform better than other suppliers.

GTX is a great business that generates returns on capital north of 100%. The business has low working capital needs. There is also revenue visibility out to 2023.

Investors are probably concerned about GTX’s debt load and also asbestos liabilities. However, GTX should be able to deleverage considerably given its FCF stream. Additionally, there are no debt maturities until 2023 and 2025. The asbestos liability payments are also capped at $175 million every year.


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