2023-03-16 05:29:35 ET
Summary
- In 2025, one in five VW cars will be electric.
- Volkswagen announces a €180 billion investment in EVs over the next 5 years. €15 billion will also be allocated to PowerCo (cell battery producer).
- Dividend confirmed, more than €35 billion in cash, strong order backlog, and unique luxury portfolio. Our buy rating is confirmed.
Currently, Volkswagen AG's market cap is €75 billion (VWAGY) (VLKAF) (VWAPY). Despite the recent P911 IPO, the company is continuing to be the major shareholder. Here at the Lab, we already provided various updates on Volkswagen Group and as a reminder in our sum-of-the-part valuation, we said:
Aside from the special dividend already distributed, yesterday P911 announced a core DPS of €1. In detail, despite a complicated economic scenario, P911 confirmed the medium and long-term objectives with a ROS between 17% & 19% and an expected turnover between €40 and €42 billion. At writing time, P911's market cap stands at €100 billion and in Volkswagen SOTP valuation, we then derive a value of €75 billion (which is already equal to its current market cap). If we price Traton (a listed company) in which Volkswagen has an equity stake equal to 89.72%, we increase our value by an additional €7.7 billion . Even if they are private (still fully owned by Volkswagen), we should also mention Lamborghini and Bentley. Considering a 30% discount compared to Ferrari, we should (again) add at least an additional €30 billion in equity value . Even assigning no value to Audi, Volkswagen, Skoda, and Ducati (all in profits), and considering the company's cash & cash equivalents (€36.5 billion), we fairly assume that Volkswagen Is Really Undervalued with at least a discount of 58%.
Q4 and FY results
Looking at the carmaker's financials, despite a decrease in volumes (-7%), sales increased by 12%. Going down to the P&L, the company's operating profit before special items reached €22.5 billion and was up by 13% compared to the 2021 account, and demonstrated Volkswagen Group brands strength, continued cost discipline, and a stronger model mix. On a negative note, the company's automotive division's net cash flow significantly decreased to €4.8 billion due to higher working capital requirements for supply chain disruptions. However, the management note that this negative effect will largely reverse in 2023. With an order book of approximately 1.8 million cars and a unique product portfolio, the company expects a positive 2023 and an easing in logistics bottlenecks.
BEV and CAPEX
Electric car deliveries accounted for 7% of VW output and increased by 26% compared to 2021 for a total of 572,100 units. With additional models expected to be released in 2023, Volkswagen Group will remain the EU BEV leader and by 2025, according to the company's estimates, one out of five VW cars will be electric. In China only, EVs increased by 68%. Despite that, Volkswagen is ready to accelerate its electric car investments. Between 2023 and 2027, the German giant will invest €180 billion in what it considers " the most profitable areas " of its business: the production of battery cells, the digitization of China, the expansion of its presence in North America, and the development of its flagship vehicles. The solid financial position should allow the manufacturer to " continue to invest " in these areas even " in an economic context full of challenges ".
€15 billion will also be allocated to the construction of a cell factory called PowerCo, a subsidiary fully active in the battery business. Yesterday, the company announced the construction of a gigafactory in Canada with activity starting in 2027. By 2030, PowerCo is expected to generate an annual turnover of over €20 billion. As for combustion engines, the group plans to continue investing in the latest generation models, with a peak in 2025 and then a steady decline.
Conclusion and Valuation
Here at the Lab, we are confident in the value recognition of VW's top product portfolio and the Porsche IPO was a positive confirmation of its underlying strength, which amongst other assets, as already mentioned, also includes the luxury brands Bentley and Lamborghini, and a premium brand such as Audi. Our internal team continues to believe that this current value is underappreciated, and in particular, Volkswagen is positioned to be a volume leader in the EV segment. Aside from our SOTP valuation, with a current P/E of 4x, we believe that the German car manufacturer is discounted. Our EPS estimates for 2023 stand at €32.70 and with a P/E of 6x, we fully confirmed our target price of €202 per share.
For further details see:
Volkswagen: Current Value Is Underappreciated