Renault top pick, TP +25%; Faurecia -17%
Pent-up demand in Europe to drive positive
operating leverage; China volumes to recover in 2H
Initiating coverage of five stocks in the European autos sector
Although we initiate with a Bullish view on the sector, based on year-to-date stock performance we see selective opportunities for investors to capitalise on current valuations, and initiate coverage with the following ratings:
* Buy: Renault (EUR 117 TP; 25% upside potential)
* Reduce: Faurecia (EUR 31; 17% downside potential)
* Neutral: Continental (EUR 211), Valeo (EUR 126), Peugeot (EUR 17)
Renault is our top pick with 50%-plus potential upside (blue-sky scenario)
Our analysis suggests that the core Renault business (ie, excluding any investment holdings), for which we expect EBIT to increase by 30%-plus in each of the next two years, is being undervalued by the market. Simply stripping out its owned portion of the listed investments (Nissan, Daimler and Avtovaz) implies that the core business trades at a 40% discount to its pre-crisis peak in 2007. We believe that this valuation gap will close as investors’ willingness to pay a higher multiple for a growing business with strong momentum (helped by the launch of new models in the next 12 months) increases.
If we were to apply our house view on Nissan (Buy; JPY 1,900 TP), and use the target price set by our Japanese analyst, the increase in the value of Renault’s ~44% stake would add 25% to our target price