New Renault Plan Less Ambitious, More Makeable

“At Renault, Nissan dividends and Turkish profits are going to be needed to keep France solvent” 

Renault’s previous strategic plan turned into an embarrassing failure, so its latest attempt to forecast the future was short on excitement and long on bland targets likely to be met without breaking sweat.

Some investors had hoped for a full merger between Renault and its Japanese alliance partner Nissan, or at least some attempt to sort out what they see as the unsatisfactory financial arrangements of the joint venture.

Carlos Ghosn, CEO of Renault and Nissan, outlining the plan for 2013 in Paris on September 10, had other ideas.

But Ghosn did confirm the leaked target of an operating profit margin for Renault of at least five per cent by 2013. The previous target in “Commitment 2009” was six per cent, together with a claim thatRenault would be Europe’s most profitable car company by 2009. In 2009, Renault actually lost €3.13 billion for a margin of minus 1.2 per cent as economies were shattered by the worst recession in 60 years. The new sales target is three million vehicles in 2013. That compares with the 2009 target of 3.3 million, and the actual outcome then of 2.31 million, a shortfall of about one million.

Some analysts pointed out that Renault’s position in Europe is  deteriorating and it might need a big performance from emerging markets for the targets to be met.

Deutsche Bank analyst Gaetan Toulemonde thought the targets were attainable, with a little bit of help from Nissan. Renault plusses included

• Controlling stake in Nissan which is a fantastic asset for Renault, with capex, R&D, purchasing synergies.
• A full-entry lineup thanks to Dacia, that is growing fast and generating high margins above six per cent.
• A pioneer position in differentiating electric vehicles.
• Leadership in Russia – Renault, AvtoVAZ and Nissan are preparing to double volume by 2014-15.

Toulemonde said though that if the Renault plan fails, this might force a change in the Alliance’s corporate structure.

Ghosn said Renault would seek to concentrate on selling its no-frills range of little Dacia cars in the third world. To meet hoped-for demand, Renault plans to build up capacity in Morocco, South America, India and Russia. Ghosn also pledged to cut production costs by 12 per cent, and raise capacity use in European factories by 20 percentage points.

Ghosn also said the company will seek to concentrate on more upmarket cars, electric vehicles and batteries. In Commitment 2009, Renault pledged that its flag-ship Laguna would be in the top three of European models in terms of quality. That didn’t happen. Renault has also bet the ranch that battery-only electric vehicles will account for 10 per cent of the world market by 2020, when other companies reckon this will be closer to one per cent.  Renault and Nissan have committed €4 billion to develop all-electric cars.

Some investment bankers were underwhelmed by the news.

“At first glance (the Strategic Plan) looks conventional – targeting new models, fuel efficiency, improving brand image, modular platform strategy,” said J.P.Morgan analyst Ranjit Unnithan.

Unnithan liked the free cash flow target of €2 billion for 2010-2013, and plans to cut European capacity.

“They are talking about reducing European capacity by 440,000 units (23 percent) during 2011-2013 – a clear positive for Renault and the industry, in our view,” Unnithan said.

But he noted the lack of changes in the shareholder structure between Nissan and Renault, and the ruling out of a merger with Nissan.

“This is probably what has disappointed some investors today, but we have always seen any capital structure changes as unlikely,” Unnithan said.

Credibility gap
Bernstein Research auto analyst Max Warburton said before the press conference that Ghosn’s credibility was harmed by a lack of realism in the original 2009 plan. Warburton had also called for action to reform the Renault-Nissan corporate structure, saying it was fundamentally inefficient.

“Ghosn just disappointed investors with a strategic plan that totally fails to address this issue,” Warburton said.

Warburton said Renault is a “profoundly” undervalued company, with its 44.3 per cent stake in Nissan not properly recognised.

“A merger of Renault and Nissan would immediately lift the value of Renault’s equity and Nissan’s in our view. While Ghosn made sure to say he would never rule it out, stating that the structure is not set in stone, it can change over time, we believe a Renault-Nissan merger, with Ghosn as CEO is (unlikely),” Warburton said.

Citigroup Global Markets auto analyst Philip Watkins’s pulse rate wasn’t quickened by events either, saying most of the news had been well flagged before. He liked the planned new treatment of dividends, which would allow Renault shareholders to benefit as if they were Nissan shareholders. But Watkins reckoned that with the experience of the alliance over more than 10 years, investors wouldn’t have great confidence that new targets would be met. Watkins also pointed to Renault’s deteriorating profit position in the second half of 2010.

Loss-making
“As the loss-making second half Auto performance also shows, Renault doesn’t control the European economy, has low pricing power and can’t influence raw materials,” Watkins said.

According to ratings agency Standard and Poors, Renault’s Auto operating margin slipped to minus 0.1 per cent in the second half of 2010, after a profit of 2.2 per cent in the first half. Overall in 2010, Renault recorded net income of €3.42 billion – including finance and trucks – compared with a €3.07 billion loss the previous year.

Commerzbank auto analyst Sascha Gommel said he was waiting to see how Renault implemented the strategic plan, and that investors were cautious because of the previous one’s failure.

Bank of America Merrill Lynch analyst Thomas Besson thought Renault was now in a better position to prosper than before.

“Renault’s core business can generate cash today with much lower Autos margins than historically, as a closer collaboration with Nissan finally allows Renault to operate with capex and R&D at less than nine per cent revenues compared with 11 per cent pre-crisis. Renault shareholders can therefore expect a full recycling of future associates dividends in the coming years plus a share or Renault core free cash flow,” he said.

Bernstein’s Warburton also picked up on the weakening outlook for Renault, saying it reported a negative operating margin in its auto division (excluding trucks and finance) in the second half of 2010.

“Renault is at the peak of its product cycle with Megane/Scenic,” said Warburton. Yet it (Renault) is losing money, European market share will come under pressure from here. Only emerging markets can possibly get Renault anywhere near its 2013 margin target, when Megane/Scenic will be in the twilight of their famously volatile sales cycle. Renault in Europe can only be kept afloat by transfers from abroad. At the European (Union) level, the Chinese are buying Greek bonds and the Germans are guaranteeing Irish debt. At Renault, Nissan dividends and Turkish profits are going to be needed to keep France solvent,” Warburton said.

Neil Winton – February 15, 2011