>>> What happened
Unconfirmed recent news reports (Reuters, December 12) suggest that PSA’s previously flagged capital increase of €3.5 bn may now include a rights issue at ‘below €7 per share’ (a 40% discount to our previous assumption of market price). According to the reports, the process would allow Dongfeng and the French state to acquire a 20% equity stake each; the family would be diluted to 15%. Reflecting this scenario, we reduce our 12-month SOTP-based price target to €12.1 (from €16.4) and remove PSA from our Conviction List; we reiterate our Buy rating. Since being added to the Conviction List on December 3, 2013, PSA is up 0.04% vs. the FTSE World Europe down 1.8%.
>>> Current view
In our view, PSA faces two key challenges: lack of economies of scale and a weak balance sheet. To address these issues, we believe it will need to form a comprehensive industrial partnership (most likely with Chinese automaker Dongfeng) and recapitalise its balance sheet in the process. Given the news that PSA is potentially contemplating a €3.5 bn capital increase at below €7.0 and a combined 40% stake for Dongfeng and the French state, potential dilution (as at least €2.4 bn is likely to be raised without pre-emptive rights) appears the most significant risk to shareholders.
Although the market was, in our view, comfortable with a ‘dilutive’ capital increase at €9.40 (as per October news reports), the increased dilution risk is likely to drive the share price in the near term. Over the medium term, we believe PSA will emerge as an ‘investable’ asset, well placed to benefit from a recovery in European volumes and pricing (see our industry report ‘Profit growth to drive further re-rating’, December 3). In our SOTP valuation, we continue to assume PSA divests its 57% equity stake in Faurecia, disposes of a 50% stake in Banque PSA and ultimately announces a comprehensive
industrial tie-up with Dongfeng, driving a re-rating of the core automotive business to 20% EV/sales. Key risks include weaker operating performance, higher cash burn, ongoing uncertainty over the potential capital increase, and failure to conclude an industrial partnership agreement.