* Source of opportunity
Post Daimler’s FY15 results we lower our group EBIT by -0.1%/-3%/-10% in
2016-18E with the downgrades focused primarily in Mercedes (softening FX
tailwinds on negative Rouble effects) and Trucks (weaker LatAm and Europe
volumes partly offset by positive FX). Perhaps more importantly the
company’s new capex guidance (we model PP&E of €6.6 bn / €7.4 bn in
2016/17E) results in lower free cash flow estimates (we see avg. underlying
2016-18E FCF at €5.5 bn vs. €7.1 bn previously). We commensurately reduce
our 2016E DPS to €3.75 from €4.0, and as such we now see Daimler yielding
5.9% vs. 6.3% prior.
* Catalyst
We still see Daimler as the most attractive German OEM. With truck
demand still a risk, we think Mercedes profitability is robust, with the EClass
family rolling out this year and addressing the poor profitability of the
outgoing product. We also see a smoother product cycle vs. previous years
with SUVs broadening the portfolio and supporting margins.
* Valuation
Our 12-month price target remains unchanged at €87 and is based on 2016E
ROIC of 14.0%; we assume 0.7x EV/IC equals ROIC/FMCC. The negative
impacts from lower earnings and cash generation are offset by lower
pension liabilities (now €7.4 bn vs. €11.5 bn previously). The reduction in
liabilities is due to a cash injection of €1.2 bn plus the benefit of increasing
discount rates.
* Key risks
Cyclical pressure in trucks (especially in the key NAFTA market); the product
cycle weighing more than expected on volumes/pricing; China end-market
weakness; diesel fallout; higher cost headwinds (CO2 compliance
costs/expansion costs); and adverse currency (i.e. a stronger euro) are the
key downside risks.