Top Margin Menu

VW Seeks To Persuade Investors Profit Target Attainable

VW Eschews Take-over Plans, Says MQB Will Bring Benefits Soon.

“some 33 per cent of Skoda cars are built on MQB and the margin increased to eight per cent”

OLBIA, Sardinia – Volkswagen has increased revenues 30 per cent in five years while profits remained stubbornly flat, and it invited investment bank analysts to take part in the launch of its new Passat here and try to persuade them that all will soon be coming up roses.

Early reaction to the schmoozing in Olbia, Sardinia was positive, but VW has a tough, uphill struggle to persuade investors that the company is pointing in the right direction. After all, Toyota of Japan sells roughly the same amount of vehicles but generates close to a 10 per cent profit margin while spending roughly half as much on research and development as VW. VW’s long-term profit target is close to eight per cent.

VW has set itself some big targets, although not compared with Toyota. It plans to overtake General Motors and Toyota to be the biggest in the world by 2018 in terms of sales. CEO Martin Winterkorn has announced a plan to cut costs by €5 billion a year from 2017. By 2018, VW’s group pre-tax profit goal is at least eight per cent, and six per cent for its own troubled VW name-sake brand, which is currently struggling to stay in the black.

A key element to VW’s profit improvement is the MQB modular engineering production system, but so far many analysts think this has spluttered, and has actually increased rather than cut costs.

Barclays Equity Research analyst Michael Tyndall said VW management claimed the MQB plan is working, while the company is solving the problem of over-complexity with greater efficiency. Slower growth in China will not be a problem because capacity is currently stretched to meet demand there.

Waiting for MQB impact
Commerzbank Equity Research analyst Daniel Schwarz said VW claimed MQB results hadn’t made much impact yet, but soon will.

“Only some 15 per cent of VW brand volume is currently built on MQB, this should increase to some 30 per cent by 2016. At Skoda the effects are visible, some 33 per cent of Skoda cars are built on MQB and the margin increased to eight per cent in Q2 (of 2014). We would add that Audi’s margin of over 10 per cent – despite lower transaction prices compared to BMW and Mercedes – also shows the cost-savings potential of the modular toolkit approach,” Schwarz said.

VW also reassured the analysts that it eschewed any big take-overs, and therefore would not be asking shareholders to stump up more equity to pay for them. This followed rumours VW might soon buy Fiat Chrysler Automobiles and the U.S. truck-maker Paccar.

Impressive Passat
International Strategy & Investment analyst Arndt Ellinghorst said he was impressed by the Passat, and the VW presentation underlined his view that earnings will again be flat next year. The Passat will be more profitable than its predecessor because of its MQB construction.

“For 2015, we forecast EBIT (earnings before interest and tax) of €12.7 billion,” Ellinghorst said.

Ellinghorst didn’t comment on whether he found VW’s long-term plan credible. He’d hoped for some enlightenment on the succession issue. CEO Winterkorn and chairman Ferdinand Piech are both closer to the end than the beginning of their careers.

“In order to get investors interested VW needs to

  1. Show increased operational leverage,
  2. Present a more transparent equity story and,
  3. Provide some security with respect to succession planning.

Whilst the meetings in Sardinia have provided some security with respect to the 2nd item, we are now in wait and see mode as VW starts to implement its (the €5 billion annual savings plan) Future Tracks Program and with the program back end loaded towards 2018 – material improvements are unlikely to be forthcoming soon,” Ellinghorst said.

Print Friendly, PDF & Email

No comments yet.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Site Designed and Administered By Paul Cox Photographic