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Peugeot-Citroen Financial Troubles Look Set To Fester

New CEO Wins Plaudits; End Of Iran Sanctions Won’t Hurt.

“There is still a long way to go and we expect Peugeot-Citroen to burn a further €1.1 billion in 2014”

Financially-troubled Peugeot-Citroen is in turmoil after dumping its CEO and hiring a new one recently with Renault, and investors remain convinced profits won’t be returning any time soon.

There was some good news though. The deal with Iran to lift some trade sanctions as the country halts its nuclear weapons programme means sales could resume sometime in 2014. In 2011, Peugeot-Citroen produced 480,000 vehicles in Iran and had a market share of around 30 per cent.

And some analysts cut their loss forecasts for 2014.

But the talks about a €3 billion rights issue, which was said to be a vehicle for Dongfeng Motor Corp of China to take a stake, seem to have lost momentum.

Peugeot-Citroen announced that former Renault number 2 Carlos Tavares would join the board January 1, and take over from CEO Philippe Varin later next year

Peugeot-Citroen’s automotive losses shrank to €510 million in the first half, €147 million better than the same period of 2012. The division had been expected to lose about €740 million in the first half, and about the same again in the second half of 2013. The company pledged break even by the end of 2014, after it burned through €3 billion in cash in 2012, said it would halve that in 2013 and become cash neutral by the end of 2014. Fitch Ratings said Peugeot-Citroen will probably fail to reach its targets, which might be delayed until 2015.

Kristina Church, analyst with Barclays Capital, said Peugeot-Citroen needs a solution to its cash burn and fast, although cutting spending on new products means it will inevitably become less competitive compared with its main rival Volkswagen. According to Church, Peugeot-Citroen says its 308 is a match for the Golf VII in terms of quality, but VW’s advantages in residual value strength and cheap financing gives it a huge advantage.

Worked hard
“Varin has worked hard to cut costs, focus on cash and made good progress on (cutting) capacity. There is still a long way to go and we expect (Peugeot-Citroen) to burn a further €1.1 billion in 2014, pre-restructuring, despite capex and R&D running at just 7.2 per cent of sales versus the 8.3 per cent, 5-year historical average,” Church said.

“We believe Tavares’ remit is to expand alliances but we fear (Peugeot-Citroen) has burned their bridges with GM and Donfeng talks may preclude expansion in other joint ventures, while failing to ease capacity woes,” Church said.

GM has a seven per cent stake in Peugeot-Citroen. The company has

declared that its current strategy is to move upmarket, and raise the percentage of sales outside of Europe.

Analysts were impressed by the appointment of Tavares, who left Renault earlier this year after saying he would like to run Ford or GM. His experience running the Renault-Nissan alliance at a high level was important, and the fact that this weekend motor racer was seen as a “car-guy” contrasted with recent CEOs who had been recruited from Airbus and the steel industry.

Why isn’t profit returning quicker?

International Strategy and Investment analyst Eric Hauser said in theory 2014 should be a good year for Peugeot-Citroen, as spending is cut, benefits from new platforms appear, mix improves and costs some down. But he still sees a loss in 2014, albeit a smaller one.

“We still forecast the auto business to be loss making in 2014 to the tune of €223 million compared to the consensus estimate of €500 million, ………. (but) we do wonder why the way back into profits couldn’t be more rapid. A European recovery, new management and a product story – doesn’t this make an appealing equity story?” Hauser said.

Peugeot-Citroen will launch the new 108 and 308SW in 2014, while sales of already launched models like the 208, 2008 and 308 are cranking up.

Barclays’ Church said Peugeot-Citroen appears not to be as leveraged into a European recovery as its 56 per cent exposure might imply, and market share might suffer it is not be able to benefit from a sales upsurge there.

“Until we see more concrete action on excess European capacity or any structural change to the business which would drive future growth and competitiveness, we no equity value in Peugeot’s core auto business,” Church said.

The Financial Times Lex column also expressed doubts about Peugeot-Citroen’s future because of its lack of scale in a global industry and its over-reliance on Europe. Lex said the planned co-operation with GM Europe wasn’t moving quickly, while Dongfeng alliance talks aren’t being helped by Peugeot family fears that their effective 38 per cent voting stake would be diluted.

As for investors, Lex said Peugeot-Citroen shares now look more of a gamble than a compelling investment.

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