Renault shares were up 50.00% in 2014 and 12.70% year-to-date. This excellent performance was a result of the company’s capability of beating the market’s expectations mainly due to the success of its Dacia brand which targets the low cost segment.
After this superb performance many investors may see this spike in the share price as a trigger to sell out. I tend to be contrarian and see it an opportunity to buy into a success story which has much more to offer.
What matters from this point forward is not what the company accomplished in the past but projections for the future. I expect 2015 and beyond to be an excellent year for Renault for the following reasons;
Fleet review should accelerate sales
The company will be renewing 35% of its fleet in the next 18 months which include the Megane, Laguna, Scenic, Espace and the crossover segment. Renault's new Kadjar crossover will play a key role in the brand's global growth and profitability plans. The vehicle is the brand’s first c-segment crossover model and will receive its public launch at the 85th Geneva motor show which starts on 5th March 2015. Competitors of Renault within the C-segment are the Volkswagen Golf, the Citroen Cactus etc.
On another positive note, the Renault Twingo has been nominated for the ‘Car of the Year 2015’.
Growing market share
Renault (including its interests in Nissan) increased its market share to 12.6% in 2014 from 8.3% in 2013. It is also interesting to note that in 2013, Renault had the lowest average Co2 emissions among generalist brands in Europe, with 110.1g Co2/km.
Alliances with Nissan and Daimler
Renault holds 44% of the shareholding in Nissan. It distributes all the dividends it receives from its Nissan shareholding to shareholders.
Through this alliance, Renault benefits from cost savings which are projected to increase in the coming years. These cost advantages are a result of the sharing of engines, platforms etc.
Renault also has a 1.54% exposure to Daimler (producer of Mercedes), with which it also benefits from alliances. For example the Renault Twingo is built on the same platform as the Smart Fourfour.
Increased sales to third parties
Management are planning to increase utilization of their French plants from 50% capacity utilization in 2013 to 80% in 2017. This increase in efficiency will be driven mostly through production for third parties such as Daimler, Fiat and mostly Nissan.
Further cost cutting
Management has a target of pre-retiring 20% of its French workforce. After significant savings achieved in 2013 & 2014, management have a target of reducing costs by a further €200mln in the next two years.
Strong cash flow generation leading to higher dividends
At the next shareholder meeting, Renault plans to recommend increasing its annual dividend to €1.90 per share from €1.72 the previous year.
Margins
All the above positives lead to what may be the most important factor for shareholders – higher operating margins. The main drivers being volume growth and significant cost cutting.
Conclusion
In previous articles I voiced my opinion on the benefits of investing in cyclical stocks with particular emphasis on the auto sector. This was based on the expectations of quantitative easing measures in Europe. What is attractive about this company is that we expect both revenues and reduced costs to contribute towards improved margins.
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.