Another week, another shock in the VW story. As CO2 becomes the new focus, we cut our estimates and TP to reflect the latest admission, and provide answers – as best we can – to the key emissions questions facing both VW, and the broader sector.
* It never rains for VW investors… CO2 the latest shoe to drop
VW has made a new admission of ‘irregularities’ on c.800k vehicles that give misleading CO2 results under test conditions. VW has put the cost at EUR2bn, but notes this is an ‘initial’ estimate. This comes on top of the existing EUR6.7bn provision for the 11m vehicles with NOx defeat devices, and is separate to the new EPA violation notice on 10k diesel vehicles issued on Monday (which VW denies). VW has given little detail on the incremental 800k CO2 affected cars, but we believe most (but not all) to be diesels in Europe.
* We add another EUR4bn in recall cost – and fear a harsher commercial impact
Assessing the impact of this latest shock is not straight forward. We have added a further EUR4bn in recall / customer compensation cost to the EUR12bn we had already modelled on the NOx issue. Versus VW’s own EUR2bn and EUR6.7bn estimates, this allows material leeway to cater for compensating customers for ‘lost’ fuel economy and/or residual value impact. We note that the 800k number could yet go higher. We also model an increased commercial impact in 2016, with customer behaviour more likely to be affected in our view over uncertainty on fuel economy than it has been on NOx. The net result is a 10% downgrade to ’16 EPS, with our TP falling to EUR116.
* After NOx, CO2 the new focus – incremental real world costs c.€3bn for OEMs
VW’s latest admission on CO2 will have ramifications across the sector. As with NOx, attention will likely quickly focus on the incremental compliance costs of a shift to a ‘real world’ test cycle – which we put at c.€3bn. We caution against knee-jerk over reactions, but have previously noted greatest ‘real-world’ CO2 risk at Daimler (=) & VW, and least at Renault (+). Tyre makers may be the safest place in the sector short term given their insulation from OE market disruption.