Getty Pictures/Getty Pictures Information
Whereas semiconductor chip shortages and the invasion of Ukraine by Russia have taken over the headlines, Volkswagen AG (OTCPK:VWAGY, OTCPK:VWAPY, OTCPK:VLKAF) is definitely weathering all these difficulties nicely. Right here, I look deeper into how Volkswagen is presently doing and the way it’s managing these challenges.
Funding thesis
I’ve written an preliminary article on why I imagine that Volkswagen shall be a structural winner within the EV transition race (discovered right here) and the funding thesis for Volkswagen stays intact and as follows:
- Volkswagen’s dedication to the transition is the best. It has the biggest funding spend in EV and software program, each high-growth areas of the longer term, amongst international automotive producers over the subsequent 5 years.
- As well as, Volkswagen has a transparent, formidable battery technique to assist this. VW has a unified, in-house battery technique and will probably be constructing 6 new gigafactories by 2030. All these guarantee satisfactory battery provide for its EV rollout.
- Volkswagen takes the vertical integration technique with its upstream investments. I imagine that that is key for incumbents with a purpose to have management over their EV transition and decrease their general prices.
Stable 1Q22 outcomes
In its 1Q22 outcomes, the corporate generated EUR8.5 billion in working income, with the decrease quantity being offset by higher combine and better promoting costs. The entire clear free money flows that had been generated that exclude diesel and M&A got here in at EUR2.2 billion, which was negatively impacted by a EUR2.1bn build-up of stock however the full yr goal of EUR13 billion to EUR15 billion was confirmed. The leads to 1Q22 had been additionally supported by barely larger at fairness contributions from Volkswagen’s Chinese language JV.
On the division stage, the outperformer was the premium manufacturers, which achieved 15% margins, outperforming expectations, and Porsche (OTCPK:POAHY) additionally delivered stable margins at 18.6%. The quantity manufacturers carried out in line whereas working revenue margins had been comparatively gentle at 3.6%.
Volkswagen administration has confirmed the steerage initially given for 2022. This contains income development vary of between 8% to 13% yr on yr, adjusted working revenue margins of seven% to eight.5%. Moreover, the corporate continues to information for enchancment within the provide of chips within the second half of 2022 because the tight chip scenario within the early months of 2022 are anticipated to ease. Lastly, the corporate continues to information for a BEV share of seven% to eight% in 2022 as in comparison with the 5.2% it achieved within the first quarter of 2022 because it continues to have a document excessive order backlog for its BEVs.
For my part, the reiteration of steerage is certainly a constructive and exhibits how administration has been very prudent in addition to proactive in having the ability to handle the very tough working setting immediately, with the availability chain challenges derailing many automobile producers and logistics challenges worsened by the Russia and Ukraine battle.
Confidence in bettering provide chain scenario
A number of of Volkswagen’s administration has echoed comparable assured tones of easing of chip scarcity within the second half of 2022. Particularly, CEO Herbert Diess stated that Volkswagen expects a robust second half of 2022. The corporate expects that Volkswagen will be capable of proceed on its path to taking on its competitor Tesla (TSLA) because the chip shortages ease within the second half.
By way of the easing of semiconductor provide, Volkswagen has management over its personal provide chain via higher transparency. With particular semiconductors going into particular fashions and types, Volkswagen has mapped out the chips that go into its automobiles and likewise established direct relationships with the suppliers of those chips. Additionally, Volkswagen has full transparency into the chip provide scenario in addition to devoted capability allocations that considerably enhance visibility for Volkswagen. Whereas the scenario for semiconductors might proceed to be comparatively tight via 2023, Volkswagen will leverage on its pricing energy to handle these uncertainties.
Bettering enterprise in China and EVs
Volkswagen Group CFO Mr. Antlitz claimed that the underlying enchancment within the first quarter within the China enterprise, particularly for the JV with SAIC, was because of reductions in fastened prices in addition to higher pricing skill. With out the influence of lockdowns in China on the finish of the month of March, the JV would have achieved double-digit margins. Though there stay to be uncertainties in regards to the course the Chinese language authorities will take with the covid-19 scenario, Mr. Antlitz believes that the Chinese language enterprise stays essentially sturdy and continues to focus on year-on-year development in income. The administration continues to have faith that these JVs have the pliability to catch up misplaced volumes when the semiconductor provide improves as lockdowns ease.
With Volkswagen Group’s electrical automobile (“EV”) push, there may be an order backlog in Europe via 2023. Whereas China presently doesn’t have an EV order backlog, administration expects their China EVs to be extra aggressive after a sequence of native software program upgrades. Whereas commodities costs have resulted in larger battery and thus EV costs, Volkswagen takes the view that worth hikes can clear up this and preserve the margin profile of the corporate given the sturdy order backlog and stable demand from customers.
Outlook for 2Q22
For 2Q22, I feel that we are going to proceed to see a sequential enchancment in volumes and revenues, with 2 million unit gross sales, EUR65 billion in complete group revenues, and EBIT of EUR5.2 billion.
I feel we can even see EUR28 billion in web industrial money this quarter because of a number of causes. First, there’ll probably be EUR1.2 billion in dividend funds from China. Second, there shall be EUR5.6 billion money outflow from the Europcar acquisition and cost of dividends, and lastly because of outflows of working capital.
By way of the commentary from the corporate, I feel we may see weak point in Europe when it comes to order consumption apart from the premium and luxurious manufacturers within the area. Additionally, administration must also present commentary that the product combine continues to stay stable within the group and that the corporate continues to have pricing energy to trip via the present challenges that it’s dealing with.
As well as, Volkswagen can be the beneficiary of tax incentives within the Chinese language market, and certain one of many largest winners inside the house, resulting in additional sequential enchancment within the second half of 2022. As such, my earnings forecasts for Volkswagen stay the identical and unchanged, as I proceed to take the view that the corporate is ready to meet the steerage vary and ship the outcomes it guided for earlier within the yr.
Valuation
My goal worth for Volkswagen is EUR240 per share, which suggests an upside of 85% from present ranges. This goal worth relies on a 7x 2023F P/E on my 2023F EPS forecast. I feel that this a number of is warranted given that it’s the historic common P/E for Volkswagen previously 5 years.
Danger: Scarcity in semiconductors
The scarcity of and tightness of provide of semiconductors stay the one massive near-term danger and bottleneck for Volkswagen. Whereas administration has arguably navigated a really difficult scenario nicely up to now in 1Q22, transferring into the second half of 2022, I feel that if the semiconductor scenario worsens, this might influence the restoration story for Volkswagen. That stated, administration has constantly improved transparency of the semiconductor provide for its manufacturers and fashions and that is probably so as to add worth if scarcity persists. With administration’s view that the second half of 2022 ought to see bettering semiconductor provide, I take the view that the baseline situation must be certainly one of bettering provide scenario. I proceed to trace the chance of semiconductor scarcity and the draw back danger it has for Volkswagen.
So, one massive near-term danger for VW is its semiconductor scarcity, which has been expensive for VW because it has needed to scale back manufacturing. For VW, its quantity manufacturers like Volkswagen, Skoda, and SEAT suffered probably the most throughout this semiconductor scarcity.
China client weak point
With the present covid-19 scenario in China, there are lots of uncertainties in regards to the insurance policies the federal government will probably take if the covid-19 scenario persists. Extended lockdowns will certainly harm the financial system and dampen demand for Volkswagen’s merchandise provided that prospects are unable to check drive their potential purchases. China is a comparatively massive publicity for Volkswagen Group and, as such, any severe slowdown in demand may have a detrimental influence on client sentiment and thus, convey draw back dangers to Volkswagen. As well as, there are additionally dangers that Chinese language EV manufacturers might outperform Volkswagen’s EV manufacturers given the extremely aggressive market in China. This might additionally convey aggressive pressures on Volkswagen’s margins within the area and doubtlessly might gradual its progress to rival Tesla within the area.
Giant capital expenditures
On account of elevated competitors, there could also be a necessity for Volkswagen to extend the scale of its capital expenditures. This can be wanted to keep up Volkswagen’s share available in the market and gives some draw back dangers when it comes to the necessity for heavy investments within the close to time period.
Software program dangers
Whereas Volkswagen is behind friends in software program and is spending massive quantities of investments into it from now till 2026, there may be the chance that these investments into software program don’t reap advantages as Volkswagen might lack the mandatory assets just like the expertise wanted to compete with friends.
Conclusion
There are lots of causes to love Volkswagen regardless of the challenges we see immediately. It’s executing nicely based mostly on its 1Q22 outcomes, with pricing and blend offsetting the weak point in quantity. Administration continues to be optimistic in regards to the future as they count on the semiconductor scarcity to ease because it continues on its progress to rival Tesla within the EV house. Moreover, Volkswagen can be doing nicely within the EV house, with document ranges of backlog in Europe.
I look ahead to 2Q22 and, based mostly on my preview, I feel that its outcomes ought to present sequential enchancment in fundamentals. I feel that Volkswagen is presently slightly engaging from a valuation perspective and as a price play, it’ll probably be a structural winner within the VE house within the time to come back. My goal worth for Volkswagen is EUR240 per share, which suggests an upside of 85% from present ranges.
