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PSA Stuns Investors With Strong Profits

PSA Stuns Investors With Strong Profits.

Even Opel Vauxhall Makes Money For The First Time This Century.

Achievement More Notable As Main Rivals Struggle.

Could PSA Work Its Magic To Help Struggling Ford, Fiat?

PSA Group first half profits soared more than 40 per cent and included a barely believable half billion euro contribution from Opel-Vauxhall, spurring tributes to turnaround artist CEO Carlos Tavares and probably guilt and bewilderment at previous owner General Motors.

The impressive numbers spurred investor thoughts about what PSA might do with its burgeoning profits and its turnaround skills with perhaps takeovers or alliances in the making.

The performance was all the more impressive coming alongside cries of pain from many of its competitors. Shareholders of General Motors will be asking how was it that the dumping of Opel Vauxhall was perceived at the time as being an impressive decision, now looks like a huge blunder.

Opel Vauxhall earned €502 million in the first half, compared with a loss of €179 million in the last 5 months of 2017, and the upwards of $20 billion the brands squandered in the 21st century. PSA bought Opel Vauxhall in the second half of last year.

PSA operating profit rose 41 per cent in the first half to €3 billion compared with the same period last year, on sales 40 per cent higher at €38.6 billion.

Bernstein Research analyst Max Warburton described the results as “immense”, saying he had already seen Opel Vauxhall responding to Tavares treatment.

Wildest dreams
“But these numbers exceeded our wildest dreams,” Warburton said.

Opel Vauxhall’s operating margin was 5 per cent and took PSA margins to 8.5 per cent from 7.3 per cent.

After the takeover last year, PSA set Opel Vauxhall a 2 per cent operating margin target for 2020, to be tripled by 2026.

“OV (Opel Vauxhall) just smashed its 2020 FCF (free cash flow) target and almost hit its 2026 margin target,” Warburton said.

“The brands are very weak. Much scepticism remains about PSA’s ability to fix it. But these numbers must surely silence the doubters – PSA has “fixed” OV in less than 12 months. These results should, by rights, drive a fundamental rethink of the OV deal, the value of the business and of the future of PSA. Consensus forecasts are way too low and the stock far too cheap,” Warburton said.

Reuters Breaking Views columnist Liam Proud, after lauding Opel Vauxhall’s performance, pointed out there was some artful accounting behind the improvement.

“Some 2.1 percentage points, or €209 million of the profit came from writing up the value of the acquired Opel business through so-called purchase price accounting. And higher prices, which may not be sustainable, added a further 1.7 percentage points, or €169 million,” Proud said.

Accounting quirks
But after stripping out accounting quirks, Opel Vauxhall’s margin would still have been 2.9 per cent, Proud said.

Investment researcher Jefferies said PSA’s performance was all the more impressive as it coincided with profit warnings from GM, Ford and Fiat Chrysler, while Daimler reported disappointing results. Renault Nissan worried about rising costs. Even Hyundai said upcoming demand might be weak. PSA’s turnaround skills may well be much coveted as other mass car makers flounder.

“With OV on track, management seems open to redeploying capital on projects that would leverage PSA’s skills. This is an open field, which in our view could go from working with Ford or Fiat on B segment cars at risk of being discontinued to merging operations with Ford in Latam (Latin America),” Jefferies analyst Philippe Houchois said.

Houchois said the second half of 2018 will as usual be weaker than the first half, while Opel Vauxhall will see smaller progress on net pricing, and lower production to reduce stocks. Some help from new products and the ongoing headcount reduction.

Bernstein Research’s Warburton was getting very excited.

Another legend
“We are now seeing another legend being created (after the unexpected, early death of FCA CEO Sergio Marchionne). Carlos Tavares’ achievements at PSA and now OV are extraordinary. And he is arguably only just getting going at OV. Asymmetric, company specific, US-tariff immune and reshaping what’s possible, we rate PSA “Outperform”,” Warburton said.   


 

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