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VW Said On Recovery Road, But Serious Questions Remain

VW Said On Recovery Road, But Serious Questions Remain.

“We accept there is no guarantee the deep change we are expecting is coming, but therein lies the opportunity”

    Investors were convincing themselves that Volkswagen has turned the corner in its fight to recover from “dieselgate”, but there are still very serious hurdles for the company to jump.

    The June 16 press conference on the strategic plan, as expected, was short on details about divisional financial targets, milestones, and costs savings numbers. These details of the strategy to 2025 will follow in the autumn.

    Meanwhile Fitch Ratings issued a report on VW which said the outlook for the company is negative, but managed to find some positives too.

    First the negatives:

    Fitch expects free cash flows to be significantly affected at least until 2018, with cash outflows related to dieselgate of €12 billion in 2016, leading to a negative 2.9 per cent free cash flow margin, and as further outflow of €5 billion in 2017.

    Other experts would say this might seriously underestimate the possible damage.

    However Fitch like what it called the greater visibility that has developed at VW about the magnitude of the scandal. It also liked VW’s robust financial structure and the flexibility arising from its ability to cut or delay spending and dividends, and sell assets. But it pointed to yet unknown compensation claims, litigation costs, criminal and regulatory liabilities.

    Visibility improves
    “We believe that visibility of the total cost of the crisis has moderately improved,” Fitch said.

    Citi Research saw signs VW was through the worst of dieselgate. Maybe out of a crisis, some good will come.

    “We accept there is no guarantee the deep change we are expecting is coming, but therein lies the opportunity. The crisis VW has brought upon itself appears to be prompting a new sense of reality and the acceptance major changes are needed. It is unlikely to be swift, but steady improvement is compelling right now given fears about peak auto volumes,” Citi Research analyst Michael Tyndall said.

    Berenberg Bank took comfort from VW’s comment that there will no need for a capital increase and “investability” will improve. The launch of a large SUV in the U.S. early next year, and new electric and plug-in hybrids and SUVs will improve confidence in VW’s U.S. turnaround and overall sustainability will improve.

    But for Fitch the overall worry about VW is the possibility of further skeletons in the cupboard, and the long-term grip about the company’s unwieldy and shareholder unaccountable corporate governance.

    “The negative outlook reflects the possibility of further important findings to be uncovered as a result of ongoing investigations, the remaining uncertainty regarding the final impact of all criminal and regulatory liabilities and the potential for further reputational damage to the group and its brands. An upgrade is unlikely in the absence of stronger internal control and corporate governance, in line with main peers,” Fitch said. 

    Serious internal issues
    “Key areas of corporate governance weakness include a 20 per cent blocking minority in voting resolutions, potential conflict of interest on the part of some board members, and lack of independence and diversity at the supervisory board level. The ongoing emissions crisis has also highlighted serious internal control issues. We expect the new management to take measures to strengthen corporate governance, but believe that their implementation and an overhaul of the company’s culture may take time and meet resistance,” Fitch concluded.


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