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Peugeot-Citroen Ratings Cut As Profits Slip Away

Investors Await Cost-Cutting, But Plan Delayed By Election

Peugeot-Citroen’s financial ratings were cut by Fitch because its profitability is being undermined by Europe’s crumbling economy.

Fitch Ratings said Peugeot-Citroen’s profits were under pressure because weak corporate and consumer confidence, rising unemployment and persistent uncertainty from the government debt crisis were undermining car sales.

Fitch cut Peugeot-Citroen’s Outlook rating to “stable” from “positive”.

Last month Peugeot-Citroen Peugeot shocked its shareholders with a second profit warning in three months. The company said its automotive division would only break-even for the full year, implying a loss of €400 million in the second half of 2011.

Fitch cut its estimate for Peugeot-Citroen group profits to 1.3 per cent in 2011 and 1.5 per cent in 2012.

Slight negative
“This includes a slight negative operating margin at the automotive division in 2011, roughly in line with the company’s warning in late October that this division will only be around breakeven in 2011, meaning that it will lose approximately €400 million in the second half of 2011,” Fitch analyst Emmanuel Bulle said.

J.P.Morgan Cazenove analyst Ranjit Unnithan said Peugeot’s plan to restore profit margins of between three and four per cent could take years, with the policy of slashing jobs and selling assets being delayed by France’s Presidential election next May. He said Peugeot didn’t expect to see this level of profits being achieved before 2014.

“The main reason is that the industrial footprint, specifically underutilised, high cost B segment plants in France was unlikely to be fixed before. Also, we felt it would take that long for the group’s international auto operations in Brazil and Russia to reach similar margins,” Unnithan said.

Unnithan said a vicious cycle of underutilisation, an ageing product cycle and a need for higher incentives and aggressive competitor pricing was dragging down profits.

Fitch’s Bulle though said the company’s Faurecia auto supplier subsidiary, logistics company Gefco and Banque PSA Finance provided good support for Peugeot-Citroen, but even these healthy outfits might find economic conditions debilitating.

Neil Winton – November 15, 2011

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