Press and analyst day an opportunity for management to present the “new VW”
– atthe moment VW’s management presentation with their FY results last week was just an opportunity for talk about change. And this talk went much deeper than anything we have heard before from VW management. It is exactly what the business needed, even before the diesel issues emerged. But now we believe the market needs to see delivery both in terms of cultural change but also on structural efficiencies. However, even throwing a 30% conglomerate discount, to account for the risk of change not occurring, weak multiples on weak VW brand earnings (we forecast 2-3% EBIT margin for next 5 years) and assuming €20bn in total liabilities for diesel at current cost, we still see upside in the shares to €158 (prefs). We reiterate our OW.
What do we now know on emissions?
There are still so many unknowns at VW that reaching a conclusive valuation for the business is tricky. We still don't know what is included in the €16.2bn diesel provision - the company has agreed not to disclose the full details of their provisional agreement with the DoJ. However, we can conclude that VW have tried to post as much bad news into 2015 numbers as possible. We continue to leave an incremental €3.8bn in our forecasts to factor in any further criminal suits by investors or dealers and any global costs not covered by the DoJ agreement. We believe this figure is at the upper end of any likely outcome.
What about change ahead?
Management were keen to emphasise the opportunities ahead for VW with last week’s results. Clearly a focus on sustainability via future powertrain and future mobility concepts is necessary to rebuild the brand's engineering
credentials. But there was also a focus on cultural change and efficiency. Productivity has not been a watchword of VW historically, engineering prowess was more highly valued internally – but with management comp now more aligned with the share price, could a tougher stance with the unions (and less vertical integration of the supply
chain) be possible?
What does this mean for valuation?
We continue to discount VW Brand and assume depressed volumes, pricing and margins remain. We apply a 30% conglomerate discount to account for execution risk and continued lack of visibility. We don't argue that there is a magic fix and all will be well in Wolfsburg but we do believe a lot of the bad news is now known and that a worst case scenario on liabilities seems unlikely. It will be a long, hard road to win back investors' trust and to persuade us to unlock our 30% conglomerate discount but we believe the company have made the first steps by focusing management variable compensation on share performance and any evidence of a tougher stance on costs would be a positive catalyst.