“we see an annual saving of €4.4 billion by 2018 and perhaps more encouragingly the payback appears to have arrived as of Q3 ’13”
“Perhaps VW needs to consider floating Audi”
Despite Volkswagen’s juicy profits, impressive market share in Europe, massive success in the premium sector with Audi and now Porsche, and its winning formula in China, it is still viewed with some suspicion by investors.
VW’s massive, rambling and complex structure leads some investors to wonder about hidden problems which might emerge one day to torpedo the share price, and bring them down with it.
Volkswagen’s MQB investment is the current focus of the naysayers. MQB usage is currently around one million cars a year, but this will rise to around three million in 2015. VW plans to build more than 40 new vehicles across its volume brands on the MQB platform. The first cars to use the platform – the VW Golf, Audi A3, Skoda Octavia and Seat Leon – are already on sale.
In a report entitled “Debunking the myths”, Barclays Capital analyst Michael Tyndall, seeks to put investors straight about VW’s future. Tyndall sets about the MQB strategy.
“Myth 1 – MQB is not working. On the contrary we see an annual saving of €4.4 billion by 2018, excluding China, and perhaps more encouragingly the payback appears to have arrived as of Q3 ’13. The scale and timing of the platform consolidation (MQB) savings at VW have been met with increasing skepticism, but we would argue the payback has arrived at precisely the promised timing. In addition we believe the savings should continue to grow,” Tyndall said.
Tyndall also addresses the claim that VW’s weak sales volume growth in 2013, points to a deeper malaise.
“We think tight inventories, the phased rollout of new models and pricing discipline have held back growth in 2013. The absence of incremental models has been a problem too. 2014 is unlikely to be a barnstormer given the Passat changeover, but we do think volumes will grow a modest 1.8 per cent. More significantly, we don’t think the current hiatus is symptomatic of a deeper issue, from what we can see, VW’s market position is holding,” Tyndall said.
VW has a target of selling 10 million cars before 2018, which would make it the number one car maker in the world ahead of Toyota and GM. VW aims to sell about 9.5 million cars this year, up from 9.3 million in 2012.
Berenberg Bank analyst Adam Hull is another voice embracing VW’s strategy, and he takes comfort from the launch of the Porsche Macan this month, and the improving European car market.
“Overall, European car market registrations appear to be on a clear underlying upward trend – we assume two to three per cent CAGR in 2014 to 2016,” Hull said.
Bernstein Research analyst Max Warburton has long been a VW sceptic, claiming it had over-promised on 20 per cent MQB savings. Warburton, in an attempt to value the basic VW operation, stripped out the Audi and China contributions, and said this revealed surprisingly weak financials at core VW.
“The closer you look at it the more awesome Audi looks and the poorer the core VW brand looks,” Warburton said.
“We remain unconvinced that the returns profile of core VW is going to improve any time soon – a new MQB platform or product cycle are unlikely to change things. We trim our 2013 (profit) estimates and leave our 2014 estimates, still below consensus, unchanged,” Warburton said.
Why not float off Audi to find out what it is really worth?
“Perhaps VW needs to consider IPO-ing (initial public offering) Audi to highlight its value, clarify its relationship with VW AG and leave the market to decide what core VW is really worth,” Warburton said.
Later month VW announced its capital spending plans for the next five years of €16.8 billion, flat compared with the previous plan. This comprises a three per cent decline in property plants and equipment and an increase of 10.4 per cent in R&D.
Barclays’ Tyndall is a VW believer, saying Renault and Peugeot might be cheaper stocks to buy than the German leader, but none have the brand depth and earnings quality of VW.
“We think VW is starting to head in the right direction now that 2014 expectations have rebased,” said Tyndall, in his report published before the VW capital expenditure announcement.
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