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PSA Raises Profits Again, But Restrained On Future Promises

PSA Raises Profits Again, But Restrained On Future Promises.

“Long term guidance has been upgraded but it is disappointing again”If Acquired, Opel Would Be Used To Target Export Markets

PSA Group, in the spotlight because of its audacious attempt to takeover GM Europe’s Opel-Vauxhall, was less adventurous with its own profit projections, said to be too cautious and conservative.

PSA reported profit, defined as recurring operating income, jumped nearly 20 per cent to €3.24 billion in 2016 compared with the previous year. The automotive profit margin advanced to 6 per cent from 5 per cent.

But the profit margin target for 2021 remains 6 per cent.

PSA has turned itself into a prodigious money making machine after racking up existence-threatening losses. 

In 2015 it made a net profit of €1.2 billion, its first profit in three years, and compared with a loss of €555 million the previous year. Automotive operating profit was 5 per cent. PSA was on the brink of bankruptcy and was saved by a €3 billion state-backed rescue plan after racking up more than €7 billion in losses over a couple of years. France and Chinese carmaker Dongfeng each bought 14 per cent of the company in 2014. The Peugeot family stake was reduced to 14 per cent.

Barclays Equity Research described the latest profit projections as “too conservative”.

Disappointing again
“Long term guidance has been upgraded but it is disappointing again. The company now targets “over 4.5 per cent automotive recurring operating margin on average in 2016/2018 and 6 per cent by 2021” from “4 per cent on average”. As we had expected PSA has already topped its long-term guidance we think the wording is too conservative in this situation. We can argue that “over” places the needle pretty much anywhere but we would have preferred a clearer upgrade such as “over 4.5 per cent every year defining a clear floor,” said Barclays’ analyst Kristina Church.

Investment banker Jefferies ignored the so-called “guidance” with its own prediction that group operating profit will increase by between 8 and 9 per cent this year.

Investment researcher Evercore ISI took up the theme.

“We still think that PSA’s Auto margin target is unrealistic and definitely conservative,” said Evercore ISI analyst Arndt Ellinghorst.

Meanwhile investors continued to wonder about the outcome of the takeover talks, which would create a company with the second biggest market share in Western Europe – around 16 per cent – and bring it closer to the leader Volkswagen at 23.4 per cent.

According to Professor Ferdinand Dudenhoeffer from the University of Duisberg-Essen, Opel-Vauxhall, which he says lost $5 billion over the last 5 years, would be in a weak position after a merger with PSA and would face job cuts.

Watch out Kaiserslautern, Eisennach
Dudenhoeffer said in a merged PSA-Opel-Vauxhall, production and engine making capacity would be too high. This would focus attention on the German factories at Kaiserslautern and Eisennach.

“PSA has already closed factories in France (as part of its recovery plan) and therefore, it will hardly be possible to close down French sites politically. After all the French state is a shareholder in PSA,” he said.

Dudenhoeffer calculates 6,000 job cuts will be required from Opel-Vauxhall’s workforce at a cost of €750 million.

Meanwhile PSA has been reassuring political and union leaders in Britain and France that job losses are not on the cards, but that would call into question the whole rationale of the deal.

Evercore ISI said PSA and Opel are overlapping business. 

“A successful integration is reliant on deep restructuring and industrial synergies,” said Evercore ISI’s Ellinghorst.

Ellinghorst asked how PSA would integrate GM Europe’s 40,000 employees, and 1.2 million annual production.

“Given the massive overlap of the two businesses, there should be no illusion as to what will happen in order to make the business combination work. It’s about hard restructuring in Germany, the U.K. and Spain, resulting in at least 5,000 manufacturing job cuts. In the end an integrated GM Europe will likely have 20 to 30 per cent fewer workers,” Ellinghorst said.

Opel for U.S.?
But if investors think PSA CEO Carlos Tavares was being financially conservative, his remarks after the financial results must have belayed that. Responding to criticism that PSA, long criticised for being too Europe-centric, shouldn’t be buying another European operation, he revealed his ambitions for Opel. Tavares hinted that Opel would lead an export drive, which might end up in the U.S.

Tavares has said before it was a long-term ambition for PSA to return to the U.S., which it left in 1974.

“And Opel has a quality PSA cannot replicate: its German heritage. Customers in some markets don’t consider French brands – we may think it’s unfair, but it’s a reality. They will consider German brands, based on the halo effect of the German premium brands,” the Wall Street Journal quoted Tavares as saying.

If that turned out to be true, that might cause some blushes at General Motors.

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