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Peugeot-Citroen Won’t Hit Financial Targets, Fitch Says

But Some Investors See Green Shoots Helping Peugeot.

“We believe that the adverse environment …. could delay Peugeot-Citroen’s targets until 2015”.

Peugeot-Citroen will probably fail to meet its recovery targets, according to Fitch Ratings, while questions remain about a possible investment from China.

Investment banks have mixed views on Peugeot-Citroen’s turnaround programme, but Commerzbank, admitting that its advice was not for the faint-hearted, recommended buying the company’s shares.

In the first half of 2013, Peugeot-Citroen’s automotive losses shrank to €510 million, better by €147 million compared with the same period of 2012. The automotive division had been expected to lose about €740 million in the first half, and about the same again in the second half of 2013. Peugeot-Citroen has pledged the automotive division will break even by the end of 2014. Financially troubled Peugeot-Citroen burned through €3 billion in cash in 2012, pledged to halve that in 2013 and become cash neutral by the end of 2014. But in the first half of 2013 it generated about €203 million in cash, thanks largely to slashing capital spending by close to €740 billion, higher earnings and asset sales.

Fitch Ratings said it was relieved that the first half results showed the company’s situation had not deteriorated, but general economic conditions did not bode well for the company.

“We believe that the adverse environment, the potential for sustained weak economic conditions and thus poor new car sales, notably in France and Germany, as well as notable execution risks in implementing the group’s strategy could delay Peugeot-Citroen’s targets until 2015,” Fitch said in a report.

Fitch is also unconvinced by Peugeot-Citroen’s plan to move upmarket, a trend also being pursued by Renault and Ford.

“We believe this strategy makes sense overall, but carries substantial execution risk and could take many years to bear fruit. In particular, we are concerned that the existence of both entry-level/basic models and aspiring higher-end products within the two brands will not be easily understood by customers. In addition, several other manufacturers are following the same patch and competition will remain persistent,” Fitch said.

Fitch expects automotive losses to improve this year from 2012’s negative 3.9 per cent to a negative three per cent in 2013.

Commerzbank though reckons it sees the first signs of green shoots in Europe, and this will benefit Peugeot-Citroen disproportionately because of its known over-reliance on its home market.

“Obviously Peugeot-Citroen is not for the faint-hearted but we see upside potential when the market gains trust that the automotive business will return to the black,” said Commerzbank analyst Sascha Gommel.

Buy the shares, says Gommel.

“We believe that the market will start to anticipate that Peugeot-Citroen’s automotive business will return to profitability in 2015 which should justify a positive value for the core business,” Gommel said.

Too fragile
Bernstein Research analyst Max Warburton is not convinced.

“Peugeot-Citroen does not look like a business that can survive indefinitely in its current form – it is probably too fragile, too dependent on low-growth markets and with inadequate gross margins to continue to compete in the R&D race,” Warburton said.

Peugeot-Citroen’s weak finances have led to rumours it might seek help from its Chinese partner Dongfeng, although this is complicated by General Motors’ seven per cent stake in Peugeot. GM has other interests in China which might conflict with this. And Dongfeng has an alliance with Honda.

Warburton doesn’t expect an imminent deal with Dongfeng, although he does see the possibility of GM buying more or all of Peugeot, or some arrangement where GM puts its European assets into a company with the French.

Deutsche Bank analyst Gaetan Toulemonde can see some plus points for Peugeot-Citroen, saying if the European market stabilises next year, the company would show the strongest momentum of earnings thanks to its aggressive cost reduction programme.

Breakeven in 2014
“In three years the group would have reduced its French workforce by a high 20 per cent or 15,000 people and shut down 1.5 plants. Cost saving programmes should exceed €1.0 billion next year including purchasing cost savings. And if volumes and prices stabilize most of these savings will fall to the bottom line. This is why we expect the auto division operating result to move from a loss of €1 billion in 2013 to breakeven in 2014,” Toulemonde said.

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