We decreased our price target on Valeo from €78.56 to €69.50 before the sales and revenue release out tomorrow. The reason why we are reducing the price target is just a result of a reduction in the forward P/E multiple and not a reduction in our forecasts going forward. It is not because we are concerned the results will not meet expectations.

Markets have rallied strongly since the start of the year and we reduced the P/E multiple from 16x to 14x in line with its 5-year historical average.

Given our positive outlook for the global economy and preference for cyclical stocks, Valeo continues to remain one of our top holdings for 2017. We hold a 6% position in Valeo in the equity fund.

About the Company

Valeo SA manufactures automobile components. The Company manufactures clutches, engine cooling, parts, lighting, electrical systems, windshield wipers, motors and actuators, security systems, electronics, and connective systems for automobile manufacturers and the aftermarket. Valeo's products are sold in Europe, Asia, North America, and South America.

Rationale to invest in Valeo:

  • Attractive business model – Focuses mainly on CO2 reduction (fuel efficiency) and advanced driving solutions
  • China – Valeo indicated that the strong outperformance is mainly a result of an increase in demand from China
  • Cyclical sector – We are positive about the auto sector and expect further growth in years ahead
  • Increasing its backlog – Valeo’s FY16 all-time order intake record of €23.6bn (vs €20.1bn in FY15) confirms that it has no issue attracting customers
  • Order intake – Valeo mentioned that they are seeing very strong order intake so far in FY17 and that they will leave us ‘surprised’ with the order intake number they report with 1H17 results
  • On track with current plan – Valeo is already well ahead of the mid-point targets of the 2015-20 plan thanks to stronger than anticipated organic growth, margin improvements and cash generation in both 2015 and 2016
  • Targeting new plan – Valeo rolled out its new 2017-21 financial plan, focusing on higher R&D and capex lays the foundation for further growth beyond 2021

Main objectives from the new plan are to:

  • Strongly outperform global light vehicle production by at least 7 points on average per year
  • Target operating margin of 9% by 2021. At the moment it is 7.51%
  • Increased spending on R&D and capex to stimulate growth. Margins will still increase because they plan on reducing other costs in the day-to-day management
  • Increase acquisitions
  • Target 30%+ dividend payout

Valuation

We have a price target on Valeo of €69.50, which was derived from our earnings based model. In our valuation we are assuming that the Groups attractive EBIT margins will be maintained going forward due the attractiveness of the products this company offers.

Conclusion

We are comfortable holding Valeo in a well-diversified portfolio. It is well-positioned to continue to benefit from further growth in the auto industry, as global economic growth continues to remain supportive.

Valeo has a strong set of financial statements and we expect the company to continue strengthening its position in years ahead.

We hold a 6.0% position in Valeo in the equity fund.