RNSDF - Renault: Ampere IPO Is A Key Catalyst

2023-03-26 11:23:19 ET

Summary

• Renault is accelerating on EV.
• Renault will become a holding company and Ampère will be its jewel.
• Investment grade target, back to a DPS payment, and solid 2023 guidance. Renault is now a buy.

Here at the Lab, in 2022, we preferred car manufacturers with cash on hand and who operate with a higher share of premium luxury. At our entry price, Mercedes-Benz and Volkswagen were offering a dividend yield of 9% and 7.3% respectively which was entirely covered by their free cash flow generation. In the mass-market car segment, we thought that companies led by a few catalysts and self-reliant such as Ford and Stellantis were still attractive, as many analysts were suggesting a steep earnings decline. For a corporation like Renault ( RNSDF ) ( RNLSY ), we were more cautious based on 1) the skew to the mass market segment, 2) a likely 2023 volume slowdown, and 3) many catalysts related to Nissan story . Despite our initial skepticism, we provided three positive follow-up articles:

1. Positive Numbers Ahead Of The CMD
2. Business Transformation At Full Speed
3. Renault Is Back To A Profitable Growth

Copying and pasting some key highlights from our previous publication, it is important to report that " Renault will become a holding company with the creation of 5 independent and autonomous companies" .

One of these companies is called Ampère, and according to Renault, " it will be able to count on a range of electric vehicles and capable of guaranteeing 80% of profits in the BEV car market" . Ampère is raising the bar on future projections, in detail, the company aims to achieve a 30% growth rate per year with an estimated production of approximately 1 million electric cars by 2031. According to rumors , the Group is already working on Ampère IPO and is inviting several investment banks to bid to lead the initial public offering. The EV division (of which Nissan will buy up to 15%) is expected to hit the Paris Stock Exchange in 2023 Q4. To manage the whole process, Renault has already announced the creation of a group of 15 top managers who will take the lead of the new company under the supervision of the group CEO Luca De Meo. With the management's latest indiscretion, Renault has estimated that Ampère could be worth €10 billion. As we can see from the snap below, Renault Group's total valuation is currently slightly above €10 billion.

Source: Yahoo Finance

As already mentioned, to achieve this ambitious goal, Renault is partnering and collaborating with Qualcomm ( QCOM ) which will promote an IT platform based on chip and System solutions for in-car applications and services. Another technological partner will be Google “ with which the French will strengthen the current agreement to develop a platform based exclusively on Android”. The two collaborations will allow for an improvement in efficiency and reduction in operating costs. Indiscretion confirmed that Qualcomm will likely participate in the listing process, but Renault will retain Ampère's majority equity stake. Therefore, we cannot anticipate a SotP valuation as we recently did for Volkswagen AG . Despite that, considering a majority stake (higher than 50%), if the IPO will go through, this means that Ampère will approximately represent 50% of Renault Group's market cap (and we believe that this holding discount is not justified).

Source: Renaulution plan

Conclusion and Valuation

Looking at the recent results, the company generated a yearly cash flow of €2.1 billion and announced a dividend per share of €0.25. Important to note is the fact that the company has a positive 2023 outlook with a core EBIT margin higher than 6% (vs last year at 5.6%) and an FCF estimate higher than €2 billion. Last year, Renault positively impressed Wall Street with a solid execution story, and many times, we recognized the value of the current company's CEO. In our FY update , we forecasted EPS estimates for 2023 and 2024 at 8.3 and 9.1 respectively which we confirmed today. With a holding discount and still using a 5x price earning, we arrived at a valuation of €41.5 per share and $11.5 in ADR, implying a 16% upside from the current stock price. This does not consider the Ampère future IPO and consequently Renault's sum-of-the-part valuation. Downside risks are included in our initiation of coverage .

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