We increased the price target on Valeo from €63.00 to €78.56 following the Company’s sales and revenue release for Q117. Valeo reported solid revenue results mainly due to an outperformance in China, outperforming global auto production by 8 percentage points. Management also indicate that their 5% outperformance target for FY17 is conservative.
Given our positive outlook for the global economy and preference for cyclical stocks, Valeo continues to remain one of our top holdings for 2017. We hold a 4.40% position in Valeo in the equity fund.
About the Company
Valeo SA manufactures automobile components. The Company manufactures clutches, engine cooling, parts, lighting, electrical systems, windshield wipers, motors and actuators, security systems, electronics, and connective systems for automobile manufacturers and the aftermarket. Valeo's products are sold in Europe, Asia, North America, and South America.
Rationale to invest in Valeo:
• Attractive business model - Focuses mainly on CO2 reduction (fuel efficiency) and advanced driving solutions
• China - Valeo indicated that the strong outperformance is mainly a result of an increase in demand from China
• Cyclical sector - We are positive about the auto sector and expect further growth in years ahead
• Increasing its backlog - Valeo’s FY16 all-time order intake record of €23.6bn (vs €20.1bn in FY15) confirms that it has no issue attracting customers
• Order intake - Valeo mentioned that they are seeing very strong order intake so far in FY17 and that they will leave us ‘surprised’ with the order intake number they report with 1H17 results
• On track with current plan - Valeo is already well ahead of the mid-point targets of the 2015-20 plan thanks to stronger than anticipated organic growth, margin improvements and cash generation in both 2015 and 2016
• Targeting new plan - Valeo rolled out its new 2017-21 financial plan focusing on higher R&D and capex lays the foundation for further growth beyond 2021
Main objectives from the new plan are to:
• Strongly outperform global light vehicle production by at least 7 points on average per year
• Target operating margin of 9% by 2021. At the moment it is 7.51%
• Increased spending on R&D and capex to stimulate growth. Margins will still increase because they plan on reducing other costs in the day-to-day management
• Increase acquisitions
• Targeting 30%+ dividend payout
Valuation
Over the past 5 years, the shares have been trading on a P/E of 16x. Based on 2018 forecasted earnings of €4.91, our price target on the stock would be equivalent to €78.56 per share (21% potential upside).
If we work our price target based on other analysts forecasted earnings for 2018, the price target will be higher. Example;
• Barclays are forecasting an earnings figure of €5.01 in 2018 which would result in a price target of €80.16
• Societe Generale are forecasting an earnings figure of €5.13 in 2018 which would result in a price target of €82.08
• JP Morgan are forecasting an earnings figure of €4.90 in 2018 which would result in a price target of €78.40
Conclusion
We are comfortable holding Valeo in a well-diversified portfolio. It is well positioned to continue to benefit from further growth in the auto industry as global economic growth continues to remain supportive.
Valeo has a strong set of financial statements and we expect the company to continue strengthening its position in years ahead.
We hold a 4.40% position in Valeo in the equity fund.
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.