ZF Friedrichshafen AG

Overview Key strengths Key risks One of the largest global auto suppliers, with leading market positions and long-term business relationships with most auto original equipment manufacturers (OEMs) for industrial and commercial vehicles. Supply chain disruptions and inflation resulting in higher energy, logistics, and raw material costs. Broad global geographic and product diversity in transmission, powertrain, and chassis technology, as well as in active and passive safety components. High level of research and development (R&D) to adapt to customers that must comply with stricter emission requirements and the evolving regulatory and political environment. Well positioned to benefit from industry transition toward electric drivetrains, with a broad product portfolio that includes products targeting automated and autonomous driving.Moderate dividend payouts, representing 18% of

...We think ZF's management will maintain its focus on reducing leverage through cost discipline and a supportive financial policy. In 2022, market conditions will likely remain challenging for auto suppliers such as ZF due to incremental supply chain disruptions from the Russia-Ukraine conflict and persisting inflation resulting in higher energy, logistics, and raw material costs. In that context, the company's continued discipline on costs and success in its negotiations with customers to offset rising input costs will be key to mitigate a potential dilution in its EBITDA margin. In our base-case scenario, we assume ZF's EBITDA margin will decline to 8.0%-8.5% in 2022 from 8.7% in 2021. However, for 2022, we forecast that the company's FFO-to-debt ratio will increase to above 20% (from 18% in 2021) and its debt-to-EBITDA ratio will decrease to below 4.0x (from 4.3x last year), which reflects our view of ZF's resilience to bumpy market conditions. In our scenario, asset disposals and relatively...

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