VW Profitability Problems Could Undermine Financing Costs.
Whatever Happened To Those Important Cost Cutting Talks?
As the first anniversary of Volkswagen’s balance sheet shattering dieselgate disclosure looms, opinion is divided on the underlying health of the company.
BMI Research worries that rising legal costs, and declining profits will hamper VW’s need for finance. Investment bank Citi Equity Research retains its “buy” rating on VW shares, but sees the company struggling for years to put dieselgate behind it, while investment researcher Evercore ISI points to market share losses and wonders what happened to turnaround-crucial negotiations with the unions.
VW’s own brand sales in Europe are certainly under pressure.
“Volkswagen lost more ground to its competitors as (sales) fell 13.9 per cent (to 97,145) compared to July 2015,” said industry researcher JATO Dynamics in a statement.
BMW Research forecast a struggle for finance, with VW having to fall back on the more expensive bond market.
“The emission scandal will continue to create major hurdles for VW as rising legal fees and slowing sales drag on the company’s bottom line. As a result, the company will struggle to find the resources to finance its transformation strategy with the bond market acting as a key funding outlet,” BMI said.
“We believe that mounting legal cost pressures as a result of the emissions scandal will act as a hurdle for the company’s strategy with regard to innovation and the transformation towards new technology and electric vehicles,” BMI said.
Hard to reach
VW’s savings target of €8 billion by 2025, and a profit margin of 8 per cent by the end of this year, up from 6 per cent in 2015, will be hard to reach, according to BMI. The drop in the share price after dieselgate threatens VW’s ability to raise funds via the stock market. The European Central Bank’s corporate bond purchasing programme may come in handy, it said.
Citi Equity Research talks about glimmers of hope for VW, but warns big change is still to come.
“We still maintain the main financial burden from the diesel issue is now known (and) it will take some years for the issue to be fully resolved, but in the meantime Volkswagen has both the intent and the need to make substantial changes to its costs structure,” said Citi analyst Michael Tyndall.
Evercore ISI said talks between unions and VW to pave the way for the VW brand’s turnaround plan have gone quiet, although it hoped this was because of the summer holidays. It was also spooked by VW’s market share losses.
Market share losses
Evercore ISI pointed to continued market share losses in Germany after returning to a near normal 39.1 per cent in March, Group share deteriorated to 38 per cent, equivalent to the post-crisis level seen in Q4 2015. The VW brand is performing worse still losing a further two percentage points in July to 20.4 per cent and this will put pressure on pricing.
“…….we are still missing clear evidence that VW is tackling the cost base. So far, earnings momentum appears to be largely market driven with little incremental support from efficiency gains. The time to be expressly cost-focused is now,” said Evercore ISI analyst Arndt Ellinghorst.