ValeoSA manufactures automobile components including clutches, engine cooling, parts, lighting, electrical systems, windshield wipers, motors and actuators, security systems, electronics, and connective systems. Valeo's products are sold in Europe, Asia, North America, and South America.
We maintain our price target on Valeo shares at €61.50 post Q118 results, which were broadly in line with our estimates and those of the market. 2018 is a pivotal year for Valeo.
2018 is a pivotal year for Valeo. It has to prove to investors that its business model, which has long promised to deliver attractive profitable growth, is intact. We still believe this to be the case. However, we will continue to monitor the company and if we believe things will change we will inform you accordingly.
The good from the results
The group’s CEO confirmed that organic sales growth momentum should accelerate from 2Q18 and expressed his strong confidence in delivering between 5% and 6% growth in 2Q18 and +7% in 2H18.
The ramp-up of key new contracts should also help Valeo restore its profitable growth track record in H218
Management are forecasting like-for-like growth in sales of between 5-6% in Q218
Management are also forecasting double-digit organic growth and further operating margin improvement from 2019 onwards.
The company is expecting to achieve an operating margin of 7.8% in 2018 The bad from the results.
Forex headwinds
The recent rally in the Euro put pressure on the financials in the first quarter of the year.
Adoption of IFRS 15 in Q118 makes comparison to Q117 less reliable. Without the adoption of this accounting principle, sales increased by 1%, including this IFRS sales are reported flat. Also, Q117 was a very good quarter, hence one difficult to beat Hyundai's ongoing commercial issues in China that started in 2Q17 once again impacted Valeo's performance negatively.
Valeo still outpaced global automotive production last quarter by 2 percentage points. This significant growth deceleration was, without exception, visible across all regions and business groups. Valeo-SiemenseAutomotiveJV
The JV reported an impressive order intake of €10.0bn as at end-February 2018, up sequentially from €6.1bn at end December 2017 and only €3.0bn at end-June 2017.
The Valeo Group has set the following objectives:
Nominal sales growth of around 8% for 2018; In 2018, like-for-like growth in original equipment sales of around 5%, accelerating in the second half ahead of expected double-digit growth in 2019;
In 2018, operating margin excluding share in net earnings of equity-accounted companies (as a % of sales) in line with 2017, despite the recent rise in (i) raw material prices and (ii) the value of the euro against the main currencies to which the Group is exposed. Rationale to invest in Valeo:
Attractive business model - Focuses mainly on CO2 reduction (fuel efficiency) and advanced driving solutions.
Cyclical sector
We are positive about the auto sector and expect further growth in years ahead. Valeo’s order backlog continues to increase.
Valeo mentioned that they are seeing very strong order intake so far in FY18 and that they will leave us ‘surprised’ with the order intake number they report with 1H18 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
Valeo rolled out its new 2017-21 financial plan focusing on higher R&D and capex lays the foundation for further growth beyond 2021.
The 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.
We have a price target on Valeo of €61.50, which was derived from our earnings based model. In our valuation we are assuming that the group's attractive EBIT margins will be maintained going forward due the attractiveness of the products this company offers. 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.
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.