RNSDF - Renault: Betting On A Greener And Electric Future (Rating Upgrade)

2023-09-11 04:57:52 ET

Summary

• Renault's Ampere business is targeting a public listing next year, and this might be a key positive re-rating catalyst for the company.
• Renault's Alpine business is in the early innings of growth, considering the potential to expand into new geographical markets and introduce new vehicle models.
• I lift my investment rating for Renault stock to a Buy, as I view the stock as undervalued.

Elevator Pitch

I award a Buy investment rating to Renault SA ( RNSDF ) [RNO:FP]. Previously, I wrote about the company's "potential corporate actions" such as the monetization of its investments and shareholder capital return in my September 7, 2021 update .

For this current article, I outline what Renault is doing to prepare itself for the growing popularity of Electric Vehicles (EVs) and the rise of the green economy. Late last year, Seeking Alpha News reported that Renault is restructuring to become a "holding company made up of 5 new entities", including Ampere which is "focused on EVs" and Alpine that "will cater to high-end zero-emission global brands."

My analysis suggests that Renault's Ampere and Alpine businesses put the company in a good position to benefit from a greener and electric future. Renault's current valuations are undemanding which implies that a favorable re-rating of the company's share price is on the cards. As such, I revise my rating for Renault from a Hold to a Buy.

Electric Vehicle Business Arm Ampere Is Planning For A Public Listing

A recent September 5, 2023 Seeking Alpha News article mentioned that Ampere, RNSDF's "electric vehicle division could go public at up to €10B ($10.7B)" in 1H 2024.

This is a significant development for Renault considering two key factors.

Firstly, the IPO of Ampere might potentially act as a catalyst to re-rate Renault's share price and valuations. Based on the last traded price (€36.30) of Renault's shares listed on the Paris Stock Exchange as of September 7, 2023, Renault's market capitalization was €9.8 billion as per S&P Capital IQ data, or slightly below the potential €10 billion IPO valuation for its EB business.

The Financial Times published a news report on September 5 citing Renault CEO's comments that Renault's current market valuation is only "roughly equal to the value of its Nissan ( NSANY ) ( NSANF ) stake and the value of its bank that finances car purchases." This implies that investors are now assigning limited or zero value to Renault's ICE (International Combustion Engine) and EV businesses. Also, as per S&P Capital IQ data, the market is now valuing Renault at just 1.0 times consensus forward next twelve months' Enterprise Value-to-Revenue.

If Ampere does get listed at an implied valuation of around €10 billion and its shares continue to perform well post-listing, this could translate into valuation multiple expansion and share price growth for Renault.

Secondly, Renault has huge ambitions for Ampere, and the planned IPO will ensure that its EV business has the necessary financial resources in place to achieve its long term goals.

In the company's 1H 2023 financial report , Renault noted that its target is for Ampere to "lead European BEV race in competitiveness and technology" with a "40% cost reduction on a car-by-car basis in next vehicles generation by 2027." RNSDF also indicated in its 1H 2023 earnings presentation slides that it aims to have Ampere registering an operating profit margin of 10% in 2030, which is even higher than its 7.6% operating margin for the first half of this year.

At its 1H 2023 earnings call , Renault referred to its Software Defined Vehicle or SDV program as an "unique approach with an horizontal partnership with Google ( GOOGL ) ( GOOG ) and Qualcomm ( QCOM )." RNSDF estimated that its SDV program can deliver at least €1.5 billion of research & development expense savings for the next 10 years, thanks to a 25% reduction in software spending with its SDV program. This should allow Renault to roll out competitively-priced EVs with its Ampere business arm.

In the next section, I touch on Renault's Alpine brand.

Tapping The Potential Of The Alpine Brand

The Alpine brand only accounted for 0.2% of Renault's top line in 1H 2023 as disclosed in the company's interim results report. The Alpine business is Renault's way to capitalize on the growing premium green vehicle market. Renault has set a target for Alpine to own a pure electric vehicle portfolio in 2026 and transition to net zero carbon manufacturing by the end of this decade.

Renault has substantial growth potential in the long run that has yet to be tapped.

In terms of geographical exposure, all of Alpine's current sales are solely generated from Europe. As indicated in Renault's June 2023 Enstone Field Trip presentation slides , Alpine is the leading sports car brand in France and among the leading brands in the country with an estimated brand value of around half a billion euros. But Alpine has yet to venture significantly outside of France, with this specific market representing more than half of its revenue now. In the near term, Renault intends to expand Alpine's distribution and presence in other European markets (apart from France), South Korea, and Japan. For the long run, RNSDF hopes that Alpine can penetrate the North American and Mainland China markets.

Also, while Alpine needs to maintain its exclusivity as a premium brand, there is room for increasing the number of models in Alpine's product line-up. As it stands now, Alpine only has a single sportscar model available for sale, the A110. Renault plans to expand Alpine's product portfolio with new additions like A110 Roadster and A310. At the company's Enstone Field Trip (transcript sourced from S&P Capital IQ ) on June 26, 2023, Renault noted that the new vehicle models for Alpine will grow "the customer profit pool" and ensure that Alpine isn't limited to a "very small proportion of the people interested in sports cars."

Assuming that Alpine can execute well on geographical expansion and the launch of new models, this business could potentially register substantial top line growth. Specifically, Renault's goal is for Alpine to increase its sales by a +40% CAGR for the FY 2023-2030 period.

Separately, Alpine isn't cross-selling the company's high-margin financing services in an effective manner. According to the company's disclosures in the 1H 2023 financial report, the penetration of sales financing services for Alpine is relatively low at 22.3% in the first half of the year. In contrast, the Renault brand had achieved a much higher penetration rate of 43.8% for cross-selling financing services in 1H 2023. This serves an illustration of Alpine's potential contribution to Renault's overall profitability in the future.

Closing Thoughts

Renault's shares appear to be reasonably cheap, taking into account its current Enterprise Value-to-Revenue metric and the potential valuation of its EV business, Ampere. Therefore, I am of the opinion that Renault is worthy of a Buy rating.

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