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Peugeot Survival Looks Assured Thanks To Government Help

Cheap Loan Avoids Rights Issue Blow.
Small Car Portfolio Ideal To Exploit Scrappage Plans.

Peugeot-Citroen lost almost €350 million last year and is likely to lose more than €1 billion this year, but still has some supporters among investors.

According to Nomura International, Peugeot-Citroen’s finances deteriorated faster than expected in 2008, and earnings and cash flow will worsen again in 2009.

“Yet we anticipate a return to profitability in 2010. Peugeot’s liquidity issues seem to be solved for now thanks to the French government. The product range is ideally suited to a world of smaller and greener cars. Payback from management’s wide ranging cost cutting plan is a mere 12 months away,” said Nomura analyst Jeremie Papin.

Last month Peugeot and Renault received €3 billion each in cheap, 6 per cent loans. The loan conditions initially seemed to breach E.U. single market rules because France demanded special treatment for French employees. After much anger being expressed by its E.U. partners, it seems France may be forced to recant. Meanwhile Peugeot CEO Christian Streiff announced job cuts in France anyway, but theses were limited to about 6,000 to 7,000 volunteers.

Negative profit margin
Peugeot-Citroen’s 2008 net loss reached €343 million compared with a 2007 net profit of €885 million.

Other investors are not so sanguine.

Commerzbank analyst Gregor Claussen said he doesn’t believe Peugeot will make a profit in 2010, with a loss before taxes of €2.1 billion in 2009. Sell the shares, says Claussen.

Citigroup’s John Lawson sees a negative profit margin of 5.2 per cent in 2009.

Morgan Stanley’s Adam Jonas expects Peugeot-Citroen to “post significant losses through 2009 and 2010. In a race to the bottom, we believe Peugeot-Citroen has the least to fall from here.”

Deutsche Bank analyst Gaetan Toulemonde expects a net loss of €1.4 billion this year, but sees three positives.

  • The French government loan should finance all 2009 losses avoiding a highly dilutive rights issue.
  • Scrappage schemes across Europe could lead to more resilient sales.
  • Thanks to its expertise in small cars, Peugeot should fully benefit from these measures.

Bernstein Research’s Max Warburton said without French state aid, Peugeot would be facing a full-blown liquidity crisis, but expects the company to fight off very serious issues in 2009 and emerge as a serious player “on the other side”.

Peugeot has said it hopes to breakeven in 2010.

“But with a €6 billion collapse in the top line (sales), it is hard to see a quick return to profit,” Warburton said.

Despite all this, Nomura’s Papin is still a believer.

“If management’s base assumption of a 20 per cent drop in European sales in 2009 followed by a flat 2010 turns out to be accurate, we think this is a stock with substantial rebound potential,” Papin said.

Neil Winton – March 2, 2009

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