Renault Boosted By Profit News, Ghosn Decision To Stay.
But Hopes Alliance Can Get Closer Look Flimsy.
“Renault is our preferred mass maker on margin expansion potential and EV leadership”
Renault-Nissan’s structure is fine. And if it ain’t broke, there’s no need to fix it”
Renault excited investors with record profits, news CEO Carlos Ghosn will stay on for 4 more years, and his pledge that the alliance with Nissan is irreversible.
Renault’s operating profit advanced 17.4 per cent to a record €3.85 billion last year. Manufacturing cost savings from the so-called Monozokuri plan increased to €663 million from €184 million. Net income rose 46.6 per cent to €5.11 billion including €2.79 billion from Nissan.
After the results news, Ghosn said in the next few weeks Renault will announce a plan to make the alliance with Nissan, and now including Mitsubishi, irreversible.
Investment bank UBS was very impressed, saying not only were the shares cheap but Renault’s plan for electric cars promised a successful future.
“Renault is our preferred mass maker on margin expansion potential and EV leadership,” UBS analyst David Lesne said.
Lesne said Russia and South America will be big contributors. Russian AvtoVAZ is now included in Renault’s results. He identified 4 key drivers for Renault.
- Core auto earnings will rise at an annual rate of 8 per cent between 2017 and 2022, double the rate of group earnings.
- Renault core has the potential to deliver free cash flow of about €2 billion leading to a group yield of around 13 per cent.
- Core dividend could triple, leading to a best in class yield of 6.5 per cent in 2022.
- A lower stake in Nissan will not have an impact on the industrial cooperation of the alliance.
Lesne also reckons Renault will be amongst the first to make money from electric cars.
“We think Renault will be the first mass maker to reach profitability breakeven by 2020 and deliver mid-single digit EBIT (earnings before interest and tax) by 2022. The launch of the dedicated EV platform with Nissan will be a key milestone. We see the weight of EVs reaching 9 per cent of the group volume by 2022. We estimate the alliance Renault-Nissan will be a leading player in EVs with a global market share of 16 per cent in 2022 and with Renault controlling about 20 per cent of the EV market in Europe,” Lesne said.
The Wall Street Journal Heard on the Street columnist Stephen Wilmot warned that investors hoping for a closer alliance with Nissan might have to wait until the French government decides what to do with its 15 per cent stake. But prospects were good.
Solid but unexciting
“Happily, investors don’t have to take a strong view on merger prospects to have a reason to invest in Renault. Full year results showed the company in good health, while the shares are cheap even for a mass-market auto maker. With a bias towards recovering emerging economies and no business in the toppy U.S. market, Renault looks well placed for the year. A merger would be a happy surprise,” Wilmot said.
Berenberg Bank described Renault’s results as solid but unexciting, but liked the prospects for better profits, particularly in emerging markets..
“We increase our operating profit estimates by about 12 per cent for the period 2018-19 driven by higher assumptions for the core business as well as for AvtoVAZ. For the core business, we expect operating profit to be roughly flat in 2018, as we expect positive momentum in emerging markets China, Russia, and Brazil to offset headwinds from currencies, raw materials and a more challenging environment in Europe. For Europe, we expect new car sales to decline 2 per cent in 2018,” Berenberg Bank analyst Alexander Haissl said.
Investment researcher Jefferies was a rare agnostic and didn’t see much cause for excitement, saying Renault profits didn’t provide much of a case for an advance in its share price.
Can it deliver?
“We don’t think investors need convincing the Alliance is irreversible; only that, merger or not, Renault Nissan can deliver returns in excess of industry average and consistent with claimed synergies. We remain unconvinced that merging Renault-Nissan would resolve perceived valuation discounts,” Jefferies analyst Philippe Houchois said.
Investment bank Nord LB reckoned Renault Nissan could get closer together in the years ahead.
“We currently see the Renault share as one of the most interesting automobile companies and confirm the investment judgement “Buy” for this,” Nord LB said in a report.
Bernstein Research analyst Max Warburton was non-committal on Renault‘s earnings prospects, but had big doubts over the possibility Renault and Nissan may eventually merge.
“Should the companies merge? If so, when and how? A more simple structure, with one company, would likely be more highly rated. Yet here we are, almost 20 years later, with the situation unresolved,” Warburton said.
Warburton said the fact France holds 15 per cent of Renault means Japan won’t be interested. And the French government, according to Warburton, wants to retain that stake.
“Don’t expect anything to happen anytime soon. We find it difficult to get exited about Renault’s results or fundamentals. European profitability is unlikely to grow much from here. The only reason to own Renault here would be if you believe it is set to merge with Nissan. Such a deal would generate 20-30 per cent upside. Is it going to happen? Perhaps. But we’ve been using the word ‘perhaps’ about this situation for 20 years. Extending Ghosn’s contract for another 4 years suggests there’s no rush to do anything. It may be that for the French government, Renault-Nissan’s structure is fine. And if it ain’t broke, there’s no need to fix it,” Warburton said.