About the company

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

Shares in Renault were down 6% on Friday post results. We see this sell off as being excessive, creating a buying opportunity. In fact, we just doubled our position in Renault in the equity fund to average down.

The shares are down because Renault announced that it will face some pricing pressure in certain markets. Despite this, we expect EBIT margin to improve in H217 for the following reasons:

1) We expect Renault to deliver volume growth from new car sales
2) Lower negative from foreign exchange
3) Strong contribution from cost savings

Taking the reported earnings for the first six months and adding to it the last 6 months EPS (which is much lower than that forecasted for H217), the shares are trading on a trailing earnings yield of 20% which is too much in our view and should adjust in the short term, resulting in a rise in price.

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, cash flow and profitability are expected to continue increasing in the coming years. Renault should be added to a well-diversified portfolio.

Disclaimer: 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. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.