NSANF - Nissan: Waiting For A Dividend Increase

Summary

• Nissan 'sold' its Russian activities to a local entity.
• This will represent a negative one-off of approximately 100 billion yen (€706.7 million).
• We are still waiting for the next catalyst. We decide to hold.

Here at the Lab, we are closely following the Nissan ( OTCPK:NSANF ) ( OTCPK:NSANY )-Renault (RNSDF) (RNLSY) story. In our last publication , we emphasized how it was still not clear what role the Japanese ally will play in Renault's new organization, and whether or not they will capital increase and participate in Ampère's initial public offering. As a reminder, thanks to Qualcomm's (QCOM) involvement, the Ampère business will be fully dedicated to electric vehicle production with a very high growth rate target of > 30% per annum and an estimated EV production of 1 million cars by 2031.

Nissan did not like the involvement of the Chinese Geely (GELYF), and during the strategic plan announcement, Luca De Meo:

preferred not to comment on the ongoing Nissan negotiations, and did not disclose communications in this regard. However, we understood that Nissan would also like to re-discuss the shareholding weight in the alliance.

Source: Mare Evidence Lab's previous publications

In the meantime, Nissan agreed to sell its Russian operations to the Central Research and Development Automobile Engine Institute for €1, taking a loss of around €706.7 million and leaving the country months after being forced to halt its production in San Petersburg. Already in March, shortly after the outbreak of war in Ukraine, Nissan Motor decide to suspend its activities. In detail, the St. Petersburg manufacturing and R&D facility will now change hands. Looking at the press release, the group assures that all Nissan Motor employees on the Russian market will receive 12 months of employment protection. The deal will be formalized in the coming weeks but the company already said that it will keep an ace up its sleeve - indeed, deal terms will assure the Japanese company an option to buy back the entity and its operations over the next six years. As a reminder, Renault already sold its stake in Russian automaker AVTOVAZ, which was worth 10% of the French maker's revenues, for a ruble in May (we already commented on that - here the publication called A Sad Day For The French Group ).

Conclusion and Valuation

In the last earnings season, the company increased its top-line sale outlook to ¥10.9 trillion from ¥10.0 trillion and its operating profit to ¥360.0 billion from ¥250.0 billion (Fig 1). Looking at the details, in our previous analysis, we anticipated this positive trend with an update called FX Might Support Nissan's Sales Exports . Currency development is now forecasted to ¥135/$ from ¥120/$. As already seen in many auto producers, the Japanese company lowered its sales volume to 3.7 million units from 4 million units (due to supply chain constraints); however, as already mentioned, FX will positively influence its operating profit target. Cross-checking analyst expectations, Nissan's EBIT margin is slightly higher than consensus but with the full impairment of its Russian division, net profit estimates are in line. What disappointed the investor community was the DPS forecast at ¥5 per share which is unchanged from the previous year (Fig 2). Although the company foresees an improvement in sales and margin, the ongoing challenges remain, and looking at the press release :

Nissan's automotive FCF turned positive in the second quarter to 206.6 billion yen but was not enough to cover the negative automotive free cash flow in the first quarter which was primarily due to low production.

Fig 1

Fig 2

Having recently analyzed the EU ACEA Passenger vehicle registrations , we can see that Nissan outperformed the European car market (in November, Nissan EU sales delivered a plus 24% versus the market at +16.3% ).

Nissan is optimizing its business portfolio and making steady progress toward its 2030 targets; however, last time, we emphasized how the next key catalyst was the dividend payment reset. Unfortunately, this is still pending. The Japanese company fundamentals are improving and there are signs of global auto recovery (the semis shortage is ending) but there is still restocking to do. Downside risks are equally important and we might expect a further deterioration in auto demand in Europe and in the USA. For this reason, we decide to maintain our target price of ¥600 target price and our neutral rating. We derived our valuation based on a target Return of Equity of 7% for the 2023/2024 forecast and an unchanged price-earning of 7x.

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