* Too early to assess value in VW’s shares: There remains little clarity on two key
questions: 1) what will be the total cash cost of fines, settlement, and recalls? 2) What
reputational damage will the revelations have on customers’ buying behaviour? In this
note we assume that the direct cash cost to VW is €25bn and reduce our forecast for
VW unit sales for the remainder of 2015 and FY16. Incorporating these assumptions,
we stay Equal Weight and reduce our price target for VW Preferred shares to €106 and
to €127 for the Ordinary shares.
* We estimate €25bn of fines spread over 2015-17: We analyse precedents to estimate
€10bn of recall costs and NOx compensation, €8bn of US fines, €2bn for fines outside
the US, €1bn for a US class action lawsuit, €2bn of “economic risk” for CO2 deficiencies,
and €2bn of potential CO2 fines.
* Future sales will be impacted by fears of declines in the residual values for VW, in
our view: Resale values of models affected by the scandal have fallen significantly and
models are taking longer to sell. The full repercussions of this are unlikely to be seen
until the November sales data. We now expect 2015 sales volumes to be down by 2.5%
(compared with management guidance for flat sales) and FY revenue to increase by
3.2% (compared to the 4% management target).
* We are lowering our price targets for the preferred and ordinary shares from €240
to €106 and €127, respectively, but maintain our Equal Weight rating: We have
updated our SoTP for our revised estimates and have factored in a €25bn cost for the
existing NOx and fuel consumption scandals. We are applying discounts of up to 70%
to the multiples of VW’s brands in our SoTP given the obvious concerns over further
problems, and we have added a 20% premium to the ordinary shares because of the
value of their voting rights. While the shares have fallen far and we see more value in
the business than investors are currently willing to ascribe, we equally think that until
there is some sign that the investigations by VW and by the regulators are complete,
the shares will not outperform.