RNSDF - Renault Is Back To A Profitable Growth
Summary
- Doubled profits and returned to the dividend payment.
- Luca de Meo confirmed: "we have recovered and we are back in the race. That's the automotive beauty industry - it's always possible to reverse a negative situation"
- It is an execution story now, and on the valuation, we are still neutral.
Starting with the CEO's words : " 2022 has more than kept its promises thanks to results above Renault's initial objectives and market expectations, the company completed the "Resurrection" phase three years ahead of schedule".
These performances were achieved despite having faced strong headwinds such as being the Most Exposed Automotive Company In Russia , the raw material inflationary pressure, and an ongoing semiconductors crisis. Aside from the negative note reported in A Sad Day For The French Group , here at the Lab, we also commented on the latest company's positive development:
- In August 2022, we published an article called Looking Beyond The Numbers in which we emphasized a better outlook;
- In October 2022, we analyzed the positive Numbers Ahead Of The Capital Market Day ;
- And recently, in December 2022, we deep-dived into the Renaulution Plan and the likely change in Nissan's new shareholder structure .
Our latest turnover projections for 2022/2023/2024 were €45/48/50 billion and looking at the total EPS, we were forecasting €5.1/8.5/9.3. So, we positively welcome Renault's ( OTCPK:RNSDF ) ( OTCPK:RNLSY ) latest accounts which are very much in line with our financial considerations.
The Boulogne-Billancourt-based automaker achieved group top-line sales of €46.4 billion in 2022, marking an increase of 11.4% versus the 2021 number and despite a 5.9% drop in volumes. There was also a significant improvement in Renault stock's profitability, in detail, the group operating margin reached €2.6 billion (5.6% of revenues), an increase of €1.4 billion in the year-on-year comparison.
This was above the management guidance at 5% and looking at the second half-year performances, the EBIT margin further accelerated, reaching 6.4%. Net income was positive at €1.6 billion but, taking into account the discontinued operations in Russia, i.e. the AVTOVAZ unit, there was a loss of €2.3 billion. As already reported, Renault sold its majority stake in its Russian unit for just one ruble, but there is a six-year option to buy it back. In 2021, as a reminder, net profits recorded a plus €1.1 billion, after two years of negative territory. Group net income was in line with Wall Street analyst consensus.
Source: Renault Q4 and FY 2022 results presentation
Scrutinizing expectations, the automotive operating free cash flow reached €2.1 billion, beating consensus (€1.68 billion) and exceeding management forecast estimates (the company is now raising the bar with FCF at €3 billion). Important to note is the fact that the core automotive business financial situation turned positive again at €549 million compared to a debt of €1.1 billion in 2021. For this reason, the company will return to distribute dividends and is proposing a coupon of 25 cents per share, which must be approved by the general meeting to be held on May 11th. If approved, the detachment will take place on 17 May and the dividend will be paid on 19 May.
Conclusion and Valuation
De Meo also underlined the recent agreement with Nissan (NSANY) which will guarantee more freedom to the partners but at the same time more advantages in capacity scale (with shared platforms - Fig 1) and cost distribution to further scale EV and hybrid models (Fig 2).
(Fig 1)
Source: Alliance conference February 2022 (Fig 2)
Despite the loss triggered by the Russian withdrawal, the company returns to the dividend payment after four years. However, the fundamentals that emerge from the 2022 financial statements are solid, and the company's greater profitability is the result of a strategy that envisaged new models, electric vehicles, and fewer vehicle discounts. The Renault foundations have been restored with discipline, and the 2023 financial perspectives are rosier than ever.
We should also note that Renault made progress on the energy transition front, with the achievement of the goal of reducing the global carbon footprint by 25% compared to 2010. In a still challenging context, the group aims to improve its performance in 2023, with an operating margin of at least 6% and an operating free cash flow greater than or equal to €2 billion. As announced during the company's Capital Market Day, Renault's priority is the return of an investment grade rating. This is turning into an execution story and looking at the total EPS estimates for 2023-2024, we arrived at 8.3 and 9.1 respectively. Applying a discount and still using a 5x P/E, we derived a valuation of €41.5 per share ($11.5 in ADR), which confirmed our neutral rating target .
For further details see:
Renault Is Back To A Profitable Growth