Sometimes, we must be affected person and benefit from the fairness market alternatives. Final yr, we reported our bullish view on Enel, whereas this yr, our inside staff believes Volkswagen (OTCPK:VWAGY, OTCPK:VLKAF, OTCPK:VWAPY) is ready to outperform. This isn’t the primary time we’ve got lined what we see as ‘the Most Discounted Auto Inventory;’ nonetheless, it’s important to recap that Volkswagen has a unfavorable stub worth. The corporate’s fairness valuation is decrease than P911 and Traton’s fairness stakes (each firms are listed). This assemble, coupled with a dividend yield of> 7.5%, is the clear market message. One other anomaly on the present €58 billion fairness valuation is the reversal working capital requirement anticipated in 2024 coupled with the present automotive liquidity at €36.7 billion in Q3-end. As we will see from the Volkswagen internet liquidity waterfall, the firm was negatively impacted by larger inventories and by a one particular dividend fee from the P911 IPO. We anticipate a constructive pattern on the Lab, elevating our free money stream estimates to €15 billion in 2024.
Supply: Volkswagen Q3 outcomes presentation
The final 1.5 years have been painful, from disappointing electrical automobile gross sales to dropping China market management and no valuation improve from P911’s preliminary public providing. Wanting again, we consider the Auto main has struggled to show its measurement into scale and totally leverage its product portfolio. Makes an attempt at centralizing bills to cut back complexity have been costly and resulted in price duplication. Right here on the Lab, we have been constructive on the P911 IPO; nonetheless, this has revealed the valuation drain from Volkswagen Group’s core underperformance. Subsequently, even when we assist a sum-of-the-part valuation, we consider extra IPOs (Lamborghini and Bentley) will unlikely create stakeholder worth till the corporate’s core efficiency is fastened.
Why Volkswagen is a High Decide?
- In November, the EU automobile market grew by 6.7%, marking the sixteenth consecutive month of enlargement. Nevertheless, after 13 straight months of double-digit progress, this enhance, in response to the information communicated by ACEA, has been decrease than anticipated with a single-digit quantity. Some markets have had substantial double-digit features, together with two of the most important: Italy (+16.2%) and France (+14%). In distinction, the German automobile market contracted, recording a decline of 5.7% in comparison with November 2022. EV share has remained steady at 14.2%, always exceeding diesel automobiles at 13.7%, whereas petrol automobiles maintained the management. In Germany, amongst different issues, authorities incentives are actually faraway from December onwards, and gross sales of electrical autos suffered a setback, with a drop of twenty-two.5%. All main automobile producers within the EU alone recorded a year-on-year enhance aside from Stellantis and Toyota. In November, in comparison with its residence market, Volkswagen registered a constructive efficiency of +11.4%, with deliveries at 231,743. Supported by our newest publication on VW, the US can also be evaluating measures on Chinese language electrical automobile restrictions. In accordance with the Wall Avenue Journal, the Biden administration is contemplating elevating tariffs on Chinese language electrical automobiles to restrict exports. The EV panorama in Europe is totally different than in the US, the place tariffs are already excessive sufficient to discourage competitors from China, which exported almost 48,000 EV cats to North America in October in comparison with greater than 564,000 autos despatched to Europe. With potential larger tariffs from China and decrease incentives within the EU and the USA, conventional OEMs equivalent to Volkswagen can maintain extra progress charges from flamable engines. Wanting on the ACEA knowledge, this can not go unnoticed and can doubtless assist Volkswagen within the EV transition;
- We’re witnessing a administration change in taking a extra pragmatic strategy to extend Volkswagen’s competitiveness within the upcoming years. In 2023, confronted with slowing gross sales, Tesla sacrificed industry-leading margins and decreased the costs of its 4 fashions, with specific consideration to China. Volkswagen is presently not capable of compete on a gross margin degree, and Thomas Schäfer, CEO of the Volkswagen Passenger Automobiles model, determined to launch a enterprise evaluation “to begin to bear fruit as early as 2024” explaining how “that is essential if we’re to resist the more and more powerful competitors in extraordinarily difficult market situations.” On the Lab, we consider Blume (Volkswagen CEO) has a strong monitor document of working P911 and can make troublesome selections, together with headcount and price discount. The corporate’s competitiveness is in danger. Communication with the Employees’ Council seems open after years of pressure below the Diess CEO. Governance is a further essential danger, however there’s a sense of urgency on the Group degree, and the CEO is ready of energy. We consider that low-hanging fruits could be achieved with out compromise and the corporate not too long ago introduced a €10 billion financial savings program. This contains decrease workers reductions with early retirement than layoffs, decrease R&D bills, and financial savings in SG&A prices. As well as, the CEO is elevating the accountability of manufacturers;
- This announcement, coupled with exterior partnership and cooperation. XPeng’s new funding was introduced, and we consider that CARIAD software program will doubtless observe with an possibility for a JV within the battery. It will finish Volkswagen’s insularity that drove administration selections prior to now twenty years. As well as, the corporate ought to regain Wall Avenue confidence, and investor curiosity would require proof factors. China CMD in April 2024 will doubtless be a constructive catalyst. We preserve a soft-landing auto {industry} situation as we consider a reversal pattern of decrease automobile gross sales ought to characterize 2024.
Conclusion and Valuation
Having stated that, our inside staff confirmed an working revenue of €24.9 billion in 2024 (from an anticipated €23.7 billion in 2023) and an FCF of €15 billion. With these numbers, we arrive at an earnings per share of €30. Given the workforce discount, we consider Volkswagen gained’t elevate the dividend per share. Our draw back safety is the corporate’s unfavorable stub worth with sustained free money stream technology. We worth VW with a P/E of 6.5x, confirming our purchase ranking goal at €196 per share. Final yr, we doubled the S&P 500 return with our Enel funding. This marked Mare Proof Lab’s first article of the yr, so let’s hope for the perfect in 2024 and thanks to your assist.
Editor’s Notice: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please pay attention to the dangers related to these shares.