RNSDF - Renault: Supportive News

2023-06-28 10:31:15 ET

Summary

• The European car market continues to recover, and Renault confirmed its solid growth trajectory.
• Following the Renaulution plan, the company secured another capital increase dedicated to the Formula One Alpine team. This value of the unit almost €900 million.
• The company is approaching a new phase of product launches.
• Renault offers a compelling valuation with short-term positive catalysts such as Ampere IPO. Our buy rating is then confirmed.

Here at the Lab, we have a good grip on the EU OEMs. Unfortunately, we were not very lucky with the Renault rating upgrade (RNSDF), and since March-end, the company's stock price decreased by almost 9%. However, EuroStoxx 600 Automobiles and Parts index remains constructive. The European reference index is recovering above 600 points (Fig 1), and looking at the Renault stock price, for several weeks, the title has been consolidating below the solid graphic resistance set at €34. Thanks to a substantial volume increase in the last weeks, Renault has started providing a bullish signal, and we might expect a trigger. However, it is also important to note the static support in the €32 area (Fig 2).

Why are we optimistic about Renault?

1. In May, the EU car growth did not stop recovering. The European car market grew for the tenth consecutive month, and the Italian market's excellent performance drove this. Furthermore, EV share continues to grow, and looking at the aggregate level, car registrations reached almost 1 million units in the past month, marking a growth of 18.5% compared to the same period last year. A significant figure from the ACEA report is BEV market share evolution which moved from 9.6% to 13.8%, with registrations growing by 70.9% to reach 129,847 units. Looking at the leading car manufacturers, Volkswagen registered 243,013 vehicles (+19.5%), while Renault group delivered 104,089 units (+35.9%). Stellantis registered 190,688 cars in May, a figure in line (-0.5%) with 2022 numbers. In April, Renault reached an EU market share of 11.4% (from 10.2% share in March ), and in May, this positive trend was confirmed;
2. Supply constraints are easing; however, it still needs to be returned to an average level, and as a result, most car manufacturers favor the production of the most profitable models. This is supportive of Renault's margin growth story recovery. As a reminder, the company aims for a core operating margin of at least 6% in 2023;
3. To support EV market share penetration and related to our point 2), we should report that Renault has suf fered the pandemic more than other automakers. To revive the company's financials, the CEO focused on electric cars to increase profits. This explains the EV acceleration with new models, such as the Espace SUV version and the best-selling Clio city car. In addition, another twelve new models will arrive in 2024;
4. To support our SotP valuation, last time, we indicated " Ampere IPO as A Key Catalyst, " the latest management indication stated a value of almost €10 billion for Ampere (Fig 3) . However, Renault Group is a conglomerate, and yesterday, the F1 Alpine team secured a capital increase of €200 million from a group of investors that acquired a 24% equity stake, thus valuing the unit at almost €900 million. The French team was looking for investment to help them close the gap to leading F1 teams such as Red Bull, Ferrari (RACE), and Mercedes (MBGAF). This new partnership will further accelerate Alpine Formula One development, increasing brand value and diversifying revenue generation (Fig 4). However, this positive news is part of Alpine's more prominent strategic plan. Indeed, the company is forecasting €8 billion in top-line sales in 2030 and be break even in 2026 (Fig 5). The company announced seven new models by 2030 supported by a high-performance EV industrial platform range already ready for line-up expansion.

Conclusion and Valuation

Returning to our supportive buy, Renault is completing a ' Business Transformation At Full Speed ' and is ' Back To Profitable Growth '. In our conclusive paragraph, after the Q1 result release, we anticipated an EPS of 8.3 and 9.1 for 2023 and 2024, respectively. The latest ACEA data support our investment thesis, and we positively view the EV evolution in which Renault gains market share. The F1 Alpine deal is another downside protection in investing in Renault. In addition, the company's guidance was left unchanged, and so is our valuation. Therefore, valuing the company with a holding discount and using a 5x on P/E estimates, we derived a buy rating of €41.5 per share ($11.5 in ADR). Renault's initiation of coverage includes risks to our buy rating target. We must also report a further potential downside which is the conglomerate risk. Indeed , " Renault will become a holding company by creating five independent and autonomous companies" . This might create further complexity and higher execution risks.

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