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Investment Thesis

We maintain our price target of €100 on Renault. In the 4th quarter of 2017, Renault launched a new strategic plan for 2017-2022 with an ambition to reach €70 billion (at constant exchange rates) in revenues, and 7% operating margin at the end of the plan, while maintaining a positive operational automotive free cash flow every year.

We expect the improvement in valuation to come from:

  • Increasing sales: Renault envisages having nine national markets where sales exceed 200k units per year. This includes China where sales are expected to top 550k units
  • Common platforms to reduce costs: It aims to bring more than 80% of its vehicles onto common platforms in 2022 (from under 20% in 2016) and allow €18bn of R&D investment with access to €50bn of Alliance technologies
  • Electric Vehicles: Renault plans to launch 8 pure battery electric vehicles (BEV) models over the plan, all built on Alliance platforms, and 20% of its line-up would be zero-emission vehicles. 100% of e-components would be shared
  • The Global Access platform: There will be a significant expansion in the Global Access platform (Dacia brand and emerging market Renault brand using Dacia platforms and Kwid low-cost platform), which has already sold 10m vehicles since its inception
  • Light commercial vehicles: The plan also calls for the transformation of the light commercial vehicle (LCV) operations from a European leader to a top global name. Volume is expected to grow by over 40% along with a doubling of market coverage

Headwinds

  • Costs ramping into the 2020/1 CO2 targets
  • Cost of introducing new technologies to keep up with competition

Tailwinds

  • Improved growth from emerging markets
  • The market might be surprised that the costs do not ramp as significantly as feared in 2018
  • Sector pricing in a lot of pessimism and underperforming the market year-to-date
  • Renault is well-prepared for electrification than the market credits and are displaying increasing appetite for sharing impending costs via technology consortiums
  • In the near term, global volumes which have still not peaked could help drive further momentum.

Rationale for our Overweight Recommendation

We are overweight on Renault with a price target of €100 per share for the following reasons:

  • Europe’s third largest carmaker
  • 43.40% shareholding in Nissan Motor
  • These four models explain the bulk of volume growth – Renault Captur, Clio, Dacia Duster and Sandero
  • French state holds 15% interest in Renault
  • All dividends received from Nissan are distributed to shareholders
  • Very attractively priced compared to peers
  • Any improvements in the relationship between the EU and Russia will be positive for the Group
  • Renault expects sales to its partners to continue to grow and highlighted that it hasn’t included in its plan potential cooperation projects with Mitsubishi
  • Russia was one of its most profitable markets before the economic downturn. Renault alliance has about 1/3rd market share in the country and expects to benefit from a recovery in Russian auto demand once the economy rebounds, and if sanctions are eventually lifted
  • The company mentioned that through the alliance with Nissan, they will share the same electric vehicle platform and that the marginal profit contribution on electric vehicles should be positive for the group.

Outlook

Renault should be a satellite in a portfolio. Margins, cash flow and profitability are expected to continue increasing in the coming years. Renault should be added to a well-diversified portfolio.

About the company

Groupe Renault is a French multinational automobile manufacturer established in 1899. The company produces a range of cars and vans, and in the past has manufactured trucks, tractors, tanks, buses/coaches and auto rail vehicles.