Volkswagen will report earnings on the 26th of the month as Western European car sales continue trending strongly at an adjusted +2.3% year on year in the first quarter of 2018 driven a good demand in Germany, France and Spain. The US and China also produced good figures despite headwinds.
The first quarter of 2018 is expected to be solid for Volkswagen. Taken individually all VW Group brands appear to be visibly doing well or making solid progress. A flurry of new models for Skoda, Seat, Audi and even the core VW brand seem to have injected renewed optimism.
Volkswagen to outperform peers in the auto sector due to a quick recovery from the diesel emissions scandal and a reduction in the cost base due to evolving manufacturing processes.
Diesel scandal
The diesel scandal that came to light in September 2015 has so far required VW to make €25.8 billion of provisions to counter litigation, fines and compensation charges. Financial results as a consequence suffered. However, the worst fallout from the scandal was the impact on VW’s reputation. While the VW group recovered relatively quickly form the effect of the scandal, winning back customer trust is much more difficult. VWs recovery should drive up trading multiples leading to price target upgrades.
Volkswagen has also shown that its latest technology sets impressive standards. The Group’s Euro 6 diesel fleet were well within real driving emissions limits set for 2020.
New CEO
On April 12, Herbert Diess was appointed CEO of Volkswagen group with a clear mandate to accelerate the transformation of VW in a leaner, fitter and faster company. Herbert Diess previously worked for BMW. He was in charge of purchasing and development. There he gained a strong reputation as a cost cutter and efficiency improver.
Since moving to VW he is reported to have had various run-ins with the board over costs and efficiency while developing a good relationship with unions. The appointment of Diess seems to be driven by the need to accelerate changes within the Group. Previously the slow reaction time at VW was a major concern to investors.
New corporate structure
VW is reorganising its corporate structure along brand segments;
Volume: VW, Seat, Skoda and VW vans
Premium: Audi
Super Premium: Porsche, Bentley, Lamborghini, Bugatti
Trucks and Buses: Scania, Man VW Trucks
These steps are intended to give more autonomy, leverage synergies and speed up decision making in the various groups. It is also possible to create value through possible capital market offerings.
Product Pipeline
VW has clearly shown that its latest generation vehicles can meet the diesel challenge. In addition by 2025 the Group plans to launch at least 80 new models, 50 of which will be pure electric. By 2020, VW Group will have launched 3 Battery EVs and 8 Plug-in Hybrid EVs.
Valuation
Investment in VW is based on the premises that the worst fall-out from the emissions scandal is behind the company. This would imply normalisation of sales and over the coming years. Market multiples should reflect this improvement lead to an increase in the market price. Improving confidence in the auto sector may provide additional upside.
Disclaimer:
This article was issued by Antoine Briffa, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are 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.