Slipstreaming before overtaking
In this report we transfer coverage of Peugeot to Alexis Albert. We upgrade our rating on Peugeot from UW to OW with a new €22 SOTP based PT (vs. €16.5 previously). Following an impressive 2015, we believe it isn’t too late to jump on this equity story. The company is still very ambitious and we believe a very limited part of the recovery
is currently priced in. The automotive operating margin improvement is limited going into 2016 but the re-rating has barely started, in our view. On the basis of Faurecia’s market price and 1x BV for the financial arm, we believe the market gives zero value to the automotive division. Current market capitalization is less than those two assets and our estimated 2016 net cash position (€7bn). Next catalyst should be the presentation of the new strategic plan on April 5.
Racing for pole: PSA is now officially “back in the race” and its driver is going for the top spot in terms of profitability. Mr Tavares will present his new strategic vision, “Push to Pass” (2016/2021), in a month (April 5). Profitable growth will be the key topic with two obvious drivers outside Europe: China and Iran. In terms of profitability, we expect PSA to target automotive margin above the industry average (5.5% today) by 2018 or mid-plan. Lean cost structure and pricing will remain key pillars of the CEO’s plan.
2016, a critical year to build credibility: We don’t see 2016 as transition year for PSA but as a decisive opportunity to prove it has changed, a turning point in terms of rerating. By sustaining its high profit margin despite headwinds (currency and a lack of products), we expect the company to show it now sits on strong foundations. We currently forecast a flat automotive margin of 5% despite €310m currency headwind. Going into year-end, the Paris Motor Show will mark the start of a product offensive with two key vehicles (Peugeot 3008 and Citroen C3), which should fuel growth again.
Best balance sheet amongst EU mass market OEM: By the end of 2016 PSA should have the strongest net cash position (€7bn and €6.5bn including pensions) amongst European mass-market OEMs.
OW rating and EUR22 price target: On the basis of our new earnings est., our SOTP valuation stands at EUR22. The main risks to our view come from the execution of the plan and sector-related headwinds such as currency (GBP and CNY) and demand.