* Update VW has admitted it designed software for diesel cars (c. 20% of VW US sales) that
deceives US regulators when measuring toxic nitrogen dioxide (N02) emissions. VW has
been using a "defeat device" to temporarily reduce N02 emissions during testing. When the
cars are on the road they emit as much as 40 times the level of N02 allowed under US
clean air rules. VW CEO Martin Winterkorn apologised and pledged full cooperation and an
external investigation. VW could face civil penalties of up to $37,500 ( €33,200) for each of
the 482,000 potentially non-compliant 4-cylinder VW and Audi diesel vehicles sold since
2008. This implies a worst case civil penalty of $18bn or €15.9bn/€32 per VW share. In past
cases where manufacturers have admitted providing misleading information, the penalties
have been below the potential maximum figure. The previous largest fine was the $300m
paid by Hyundai-Kia for overstating gas mileage. It also agreed to pay a further $400m to
settle a class action suit. But the VW case may break new legal ground.
* SG view As well as the potential financial issue, the biggest concerns are reputational
risk and potential criminal charges. VW has long lagged in the US, and clean diesel has
been a strategic pillar to differentiate itself and meet burgeoning emissions standards. This
has been deeply compromised. The search for the responsible parties could potentially
reach management board level (who knew what?) and lead to significant uncertainty and
volatility in the stock price beyond the inevitable initial sharp mark-down reaction. VW will
likely remain under pressure and in the penalty box for some time as the investigations and
litigation gather pace. Significant management changes may be a positive catalyst.
* How we value the stock TP reduced from €280 to €180 reflecting the unprecedented
financial and reputational destruction risk, concomitant reductions in valuations of the
operational divisions, risk of management distraction, and an increase in the overall SotP
discount factor from 10% to 25% (see page 2). With fundamentals undermined, we cut our
rating to Hold from Buy with 12m projected 14.6% TSR.
* Events, catalysts & risks 9M 15 results 28 Oct. Risks to TP: downside: unprecedented
criminal and civil penalties; further slowdown in China and Brazil; upside: US situation
proves less severe than we anticipate; management change.