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PSA Raises Earnings Despite Opel-Vauxhall Handicap

PSA Raises Earnings Despite Opel-Vauxhall Handicap.

The Jury Is Out On Viability Of Takeover.

“Reviving the loss-making operations formerly owned by General Motors will be tough unless boss Carlos Tavares can find further cost cuts”

PSA Group increased sales and profits to records in 2017, despite being held back by losses from its newly acquired Opel Vauxhall subsidiary, but analysts are divided over whether the new combination will be a winner in the future.

PSA net income advanced 11.5 per cent to €1.93 billion while the group automotive margin fell to 5.9 per cent from 6 per cent. Opel lost €179 million since the takeover took effect August 1.

Bernstein Research analyst Max Warburton liked what he saw.

“Core PSA profitability just keeps improving. Second half margins were tremendous. The core business is so handsomely profitable that it gives PSA time and flexibility to sort out Opel. Second, Opel was bought so cheaply and the book value is so low, that the loss was modest. While Opel losses were so low, the cash flow was ugly, with negative working capital,” Warburton said.

Warburton said PSA will cut inventories and extend payables at Opel and the cash burn this year will be surprisingly mild. Overall, he expects the deal to work.

“There are many who question whether PSA can fix Opel. We admit there are huge challenges. But this smells like something that’s going to work,” he said.   

Other analysts with positive thoughts about the future included investment researcher Jefferies which expects Opel Vauxhall to break even this year.

Breakeven this year
Evercore ISI also expects Opel Vauxhall to break even this year and achieve a 1.8 per cent margin by 2020, just shy of the 2 per cent target.

“The core PSA automotive division continued to achieve impressive profitability (7.3 per cent) primarily thanks to new launches and we forecast margins to remain at this high level. Our forecast of 7.2 per cent in both 2018 and 2019 may now look a touch light,” Evercore ISI analyst Arndt Ellinghorst said.

“The stage is now set for PSA to demonstrate its ability in turning around a severely struggling company, a job made even more difficult given they will be attempting to do this during a period when sales are likely to underwhelm,” Ellinghorst said.

On the other side of the argument, Citi Research said it was too pessimistic earlier about Opel Vauxhall’s prospects, and has changed its  rating for PSA to Neutral from Sell. It expects Opel Vauxhall losses to hit €314 million this year.

“Meanwhile, core PSA continues to surprise to the upside in terms of volume growth and margins, which sees us upgrade our 2018 operating income by 14 per cent. In the medium term we are still worried about the headwind the group faces to reach Europe’s 2020/2021 CO2 targets, which tempers our bullishness,” Citi Research analyst Michael Tyndall said.

CO2 hurdle for Opel Vauxhall
“In 2016, PSA had the lowest average CO2 emissions in Europe at 102 g. We don’t know the 2017 figure yet, but we assume lower diesel sales mean it will be higher rather than lower. More worrying at 123 g in 2016 Opel had the third highest hurdle. We estimate making Opel compliance could cost in excess of €1 billion. In addition we think the group’s high exposure to European diesels could add a further €2 billion hurdle,” Tyndall said.

Berenberg Bank doesn’t like much about PSA or Opel Vauxhall, saying the latter’s margin hopes overlook the cash flow reality.

“We consider PSA’s auto assets to be overvalued and reiterate our Sell rating. The European cycle needs to be supportive in order for PSA to offset the Opel/Vauxhall cash burn with cash flow from the core business and retain its ability to pay dividends. We estimate that Opel Vauxhall will burn about €1.4 billion cash per year in 2018/2019 post cash synergies, largely driven by continued volume weakness,” Berenberg Bank analyst Alexander Haissl said.

Reuters Breaking Views columnist Liam Proud is impressed by PSA’s overall performance, but has little trust in the Opel Vauxhall side of the equation. Proud points out that Opel Vauxhall’s CO2 problems led to PSA demanding that GM paid back as much as half of the €1.3 billion purchase price on the grounds it had misrepresented the amount of fines likely from the E.U. because of its likely compliance failures.

“Reviving the loss-making operations formerly owned by General Motors will be tough unless boss Carlos Tavares can find further cost cuts,” Proud said. 

Bernstein Research’s Warburton glass is half full.

“We expect impressive progress in 2018 – and raised guidance early in 2019. Consensus forecasts are too low. The stock will look cheap as Opel is fixed. We reiterate our Outperform rating (for PSA),” Warburton said.


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