Flotation Could Value Volvo Cars At Up To $40 Billion

Flotation Could Value Volvo Cars At Up To $40 Billion.

“Volvo is a subscale, mid-range premium (manufacturer)”

Swedish based and Chinese owned Volvo Cars’ stock market sale is thought to be imminent, and speculation shows a wide range of investor opinions about its value, ranging from $15 billion to $30 billion, while the company is said to be seeking an eye-popping $40 billion.

Volvo Cars is owned by Zhejiang Geely Holding Group, which bought it from Ford Motor in 2010 for $1.8 billion. Geely chairman Li Shufu recently bought a 9.69 per cent stake in Daimler for $9 billion, which led to speculation Mercedes and Volvo might be up for cooperation.

Volvo has long been trying to break into the rarefied premium space owned by BMW, Audi and Mercedes. The reception by investors will show if they see Volvo as the equivalent of BMW, or maybe lesser lights like Volkswagen or Renault.

Press reports suggest that Volvo’s owners are determined to demonstrate its equivalence with the Germans by demanding a  valuation of at least $30 billion, and maybe upwards of $40 billion

According to the Financial Times’ Lex column, Volvo’s new range of SUVs, from the big XC90 though the XC60 to the compact XC40, is appealing to the right buyers.

Real and present danger
“There is a real and present danger Volvos could become cool. They were once decried as steel boxes that European dentists piloted from home to surgery to golf course. Sleek new models are attracting younger buyers,” Lex said.

Investment researcher Evercore ISI points to speculation in the media about Volvo’s value.

“At the moment, Volvo Cars is a subscale, mid-range premium (manufacturer) with an approximately 50 per cent SUV mix, 50 per cent Europe exposure, mid single digit margins adjusted for R&D accounting and questionable FCF (free cash flow) generation,” Evercore ISI analyst Arndt Ellinghorst said.

He points to the successful flotation of Ferrari, which suggested to Volvo owners it would be a good idea to bring the company to the stock market.

Ambitious acquisitions?
Investment researcher Jefferies wonders if Volvo might use the funds from a flotation for refinancing, or perhaps an ambitious acquisition program, but doesn’t suggest any candidates. It says Volvo’s sales growth has been impressive, but its margins haven’t kept up.

“Growth remains at the very high end of industry growth. Although margins are still at the lower end of premium brands at 6.4 per cent,” Jefferies said in a research note.

German premium brands have margins usually between 8 and 10 per cent.

In the first quarter of 2018, Volvo Cars reported a 3.6 per cent rise in operating earnings to $417 million, while sales rose 19 per cent to $4.7 billion thanks to a growing market in China and a recovery in the U.S. Profit margin was 6.4%.

It is much smaller than its German rivals which sell around 2 million cars a year each compared with Volvo’s 570,000.

China is Volvo’s largest market with 28,768 sales in the first quarter, followed by Sweden with 20,163 and the U.S. with 20,083. The biggest region is Western Europe with 75,900 or 51.5 per cent of all sales.

Moody’s Investors Service upgraded Volvo Car by one notch to Ba1 from Ba2 in early May, because of its improved operating performance and expectations this will continue. Moody’s reckoned Volvo was well positioned to handle future challenges in the auto industry.

More spin offs to come

“Volvo Cars’ business setup has the capacity to contend with the long-term cyclicality with the global passenger vehicles markets and its challenging landscape as a result of heavy investment requirements for 1) alternative propulsion technologies, 2) driverless vehicles, 3) the shift of production capacities towards alternative fuel vehicles, 4) connectivity as well as 5) regulations relating to vehicle safety, emissions and fuel economy,” Moody’s said.

Investors expect more spin-offs this year after Volvo Cars, including Aston Martin, Porsche, Alfa Romeo-Maserati and VW and Daimler’s trucks.

According to an earlier report from Jefferies, this could generate value of up to $123 billion.

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