Possible Strike Action, Renewed Market Weakness, Worry Investors
“Benefits from the launch of the Peugeot 208 will be more than offset by the extremely tough operating environment in 2012”
Peugeot-Citroen’s huge first half losses were no surprise to investors, but despite action to sell assets, shut a plant, and cut costs the company’s prospects still look decidedly shaky.
Peugeot-Citroen reported an operating loss of €662 million in the first half of 2012, compared with a loss of €92 million in the same period last year. Analysts estimates for all of 2012 range up to a loss of €1 billion, with red ink in 2013 too.
Peugeot-Citroen has already announced it would close the Aulnay plant near Paris in 2014 eliminating 6,500 jobs, and axe another 1,500 jobs across the organisation. It has sold assets worth €1.5 billion and launched a €1 billion rights issue.
Ratings agencies Fitch and Moody’s cut their ratings of Peugeot debt, while Deutsche Bank analyst Gaetan Toulemonde was worried about possible trade union action disrupting production, and maybe markets weakening again too.
Toulemonde said the second half should show an improvement over the first half, thanks to the launch of the 208 and a second cost reduction programme, which should reduce the losses by more than 50 per cent.
Illusory savings
“However, the European market could deteriorate further making savings illusory. And volumes could be impacted by a potential major strike next September, as there is a risk that unions may fight against the closure of Aulnay,” Toulemonde said.
He did see a glimmer of hope though.
“It (Peugeot’s actions) should be enough to allow the auto division to be at breakeven in 2014, assuming the European market does not deteriorate further. Management needs to reassure the market that the worst can be avoided. The unions need to be convinced there is no alternative to this restructuring. Otherwise, recovery will not happen,” Toulemonde said.
Fitch Ratings, in its downgrade announcement, was more pessimistic, forecasting continuing negative cash flow in 2012 and 2013, with breakeven delayed until late 2014.
“Benefits from the recent launch of the critical Peugeot 208 will be more than offset by the extremely tough operating environment in 2012, including falling demand in Peugeot-Citroen’s main markets,, increasing competition and significant ongoing price pressure,” said Fitch analyst Emmanuel Bulle.
Bernstein Research analyst Max Warburton, saw plusses as well as minuses.
“Peugeot is not going bust this year, or probably next, thanks to the less severe than feared cash burn and successful efforts to raise capital, the rights issues, disposals and a dividend from the finance subsidiary. But the current level of losses and cash burn represent an unsustainable situation, and unless Peugeot can find a way to slow the bleeding, this company is in danger of facing further liquidity problems by the second half of 2013,” Warburton said.
Neil Winton – August 1, 2012
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