Groupe Renault is a French multinational automobile manufacturer established in 1899. The company produces a range of cars and vans, and in the past has manufactured trucks, tractors, tanks, buses/coaches and autorail vehicles.
Investment Thesis
Renault shares fell 9% on the 15th of March on report by the French Media which stated that Renault misled customers on emissions approval tests. Renault continues to deny that it hasn’t breached any regulations and says that its cars are not equipped with cheating software.
Today, Renault is trading on a P/E of 6x which is very cheap compared to other companies such as BMW and Daimler which are trading on a P/E of 8x and 8.84x respectively.
This means that your concern of the E4bln hit on the P&L if they are found guilty is mostly priced in.
A back of the envelope calculation shows that if this concern is removed and the company trades on a P/E similar to that of its peers, the price target multiplied by 2016 earnings would be €100 (8 x 12.46 = €99.68). On 2017 forecasted earnings (€13.78), the price target would increase to €110.
Rationale for our overweight recommendation
We are overweight on Renault with a price target of €100 per share for the following reasons:
• Europe’s third largest carmaker
• 43.40% shareholding in Nissan Motor
• These four models explain the bulk of volume growth – Renault Captur , Clio, Dacia Duster and Sandero
• French state holds 15% interest in Renault
• All dividends received from Nissan are distributed to shareholders
• Very attractively priced compared to peers
• Any improvements in the relationship between the EU and Russia will be positive for the Group
• Renault expects sales to its partners to continue to grow and highlighted that it hasn’t included in its plan potential cooperation projects with Mitsubishi
• Russia was one of its most profitable markets before the economic downturn. Renault alliance has about 1/3rd market share in the country and expects to benefit from a recovery in Russian auto demand once the economy rebounds and if sanctions are eventually lifted
• The company mentioned that through the alliance with Nissan, they will share the same electric vehicle platform and that the marginal profit contribution on electric vehicles should be positive for the group.
Outlook
Renault should be a satellite in a portfolio. Margins, cashflow and profitability are expected to continue increasing in the coming years. Renault should be added to a well-diversified portfolio.
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.