Volkswagen Hit By Extra €2.5 billion Dieselgate Charge.
Lower Saxony Election Might Shake Up Governance.
“This is yet another unexpected and unwelcome announcement from VW”
Volkswagen investors were hit by news of an unexpected additional €2.5 billion hit to profits from costs of making its U.S. diesel engines legal.
This brings the total damage from the dieselgate scandal to close to €26 billion. VW made the announcement ahead of its 3rd quarter earnings report October 27.
Investment researcher Evercore ISI was surprised, and angry.
“This is yet another unexpected and unwelcome announcement from VW, not only from an earnings and cash flow perspective, but also with respect to the credibility of management,” said Evercore analyst Arndt Ellinghorst in a report headed “Speechless”.
He cut his forecast for VW net income by 12% for 2017.
Ellinghorst said VW hadn’t drawn investor’s attention to this imminent shock when it briefed them recently. He wants some indication from VW that it will finally start the process of modernising its governance.
“In order to keep our constructive stance on the stock, we need to see management taking action regarding the group structure over the coming months,” Ellinghorst said.
October 15 election
Ellinghorst might in fact get some good news on this front later this month. For years, analysts and investors have implored VW to change its structure to give shareholders more power and curb entrenched politicians from its home state of Lower Saxony and the unions. On October 15, an election in Lower Saxony could see the victory of Bernd Althusmann. If his Christian Democrat Union (CDU) led coalition defeats the Social Democrat’s (SPD) premier Stefan Weil, Althusmann would be entitled to a seat on VW’s supervisory board. That in theory could lead to a removal of union and political power from VW’s governance, investors dream for years as they sought to make the company accountable to them.
Latest opinion polls make the election to close to call.
Citi Research didn’t like VW’s news either but was slightly less apocalyptic.
“Disappointing as this development is, we would argue it points to issues that are largely now accounted for and in the past. Importantly it doesn’t relate to new actions associated with the sins of the past. We are still attracted to the ongoing change that VW’s diesel crisis instigated. As such, no change to our “Buy” call,” Citi Research analyst Michael Tyndall said.
“Another stumble is not ideal, but continued pressure could be helpful. From a PR perspective today’s development is a disaster. Tomorrow’s headlines will carry reminders of VW’s past transgressions, which is not going to help dealers in their showrooms Saturday. That being said, inside VW today’s developments will be a stark reminder that the crisis is not yet over, and the push to improve profitability needs to continue apace,” Tyndall said.
The increased cost was related to VW’s 2.0 litre diesel engines which VW said is proving to be more difficult that it expected.
VW has recalled about 11 million vehicles worldwide since the dieselgate scandal broke in the U.S. a couple of years ago. About 8.5 million are in Europe.