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Renault Pleases Investors with Volvo sale, Daimler Moves

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Will Volvo Profits Free Up Funds To Buy GM Stake?

You would expect Renault to be in the news as it exploited the spotlight at its home, Paris Car Show. But Renault has been capturing the attention of investors with action outside of the exhibition hall with important financial action including its long-awaited sale of a big chunk of its shares in Volvo Trucks, and a widening of its cooperation deal with its affiliate Nissan, and Daimler.

One over-excited analyst thought that the Volvo action, which generated €3 billion for Renault, might free up funds to allow it to buy shares in General Motors’ IPO later in November, and reviving thoughts of the ill-fated talks between CEO Carlos Ghosn and pre-bankrupt GM on an alliance.

According to Deutsche Bank, Renault’s presentation before the show pleased investors because the company came clean about its previous mistakes, including unsuccessful products and unclear brand identity which led to market share and earnings coming under pressure.

Deutsche Bank, in a report, pointed out that when valuing the Renault-Nissan alliance, the French side accounts for almost nothing in terms of stock market value. Deutsche Bank analyst Gaetan Toulemonde said there is significant scope for improvement in Renault because of the link with Nissan and AvtoVaz of Russia, and promising new markets in Russia, India and Korea. Renault, said Deutsche Bank, has also transferred much European production to low cost countries, and developed low cost cars and electric vehicles ahead of the competition.

Accelerating
“Renault and Nissan are accelerating joint projects which should be progressively visible on margins and free cash flow,” said Toulemonde.

He warned though that Renault is still too dependent on the Megane and Clio.

Bank of America Merrill Lynch pointed out that, unlike most major manufacturers, Renault was making money out of its cheapest Dacia-badged cars, not its most expensive ones.

“Renault’s most profitable products stand right at the bottom of its product offer, unlike most other big manufacturers that typically make higher margins on their most expensive vehicles. We estimate that Renault’s entry range should account for almost 30 per cent of 2010 volumes and about half of Autos profit,” said Merrill Lynch analyst Thomas Besson.

Besson said the new Dacia Duster was a potential game changer because of its comparatively high price and what he called “double-digit” profit margin.

“Duster sales should more than double in 2011 from 70,000 units to 180,000. This would make Duster the highest contributor to 2011 Autos profits on our estimates, and allow Renault’s core Autos EBIT (earnings before interest and tax) to be more resilient than consensus currently assumes. It is important to keep in mind Renault’s next generation of entry range products start rolling out in 2012 with a wider product offer benefitting from a new factory in North Africa. Competition remains muted in that segment for the time being,” Besson said.

Daimler
During the show, more developments were announced detailing plans to increase cooperation between Renault-Nissan and Daimler. Nissan will supply Micra-based cars to Mercedes Smart so that it can sell four-seater models in the U.S. Nissan’s Infiniti is talking to Mercedes about cooperation to build a new smaller car. Since the agreement was announced in April, Mercedes said it will sell some four-cylinder engines to Nissan, and talks continue on possible joint electric car components.

But it was the selling of most of the Volvo Truck shares that made the biggest impression on investors. The Wall Street Journal’s Heard on the Street column though pointed out that despite some good moves, Renault’s future still wasn’t assured.

“Renault is one of the cheapest but riskiest bets on the global auto sector. The stock has gotten a lot less risky now that the French auto maker has drastically reduced its debt by selling part of its stake in truck maker Volvo. Renault’s extra financial security isn’t to be sniffed at considering it was bailed out by France last year. But while a deleveraged Renault is less likely to lose its grip on the road, the way ahead still looks bumpy,” the column said.


Neil Winton – October 15, 2010

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