Renault Group Is Not A Straightforward Buy

seekingalpha09-28

1H 2024 saw revenue growth and record operating margin, but the market reaction was negative.The outlook for 2024 is cautious, with a slight decrease in margin and free cash flow.Despite progress on ...

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Manuel Milan For Renault SA (OTCPK:RNSDF) the transformation project it launched close to four years ago was not just about staying on top of industry trends, but a matter of survival. The initial goals were modest, but they were reached promptly, too. As a group, Renault has turned more nimble and open, streamlining operations and rallying partners. Its brands are doing well for themselves, with plenty of synergy between them. Still, while the group has come a long way, there is a lot of work left to be done. The stock is not the most affordable out there, so it is a Hold for me. Renault Group 2024 H1 Results Presentation Financial update Renault reported its 2024 first half results on 24 July. Although hailed a success by the management, the market reaction to H1 was not as enthusiastic: the stock on Euronext Paris (EPA:RNO) fell almost 10% within days of earnings release, down nearly 20% to date. The numbers did not actually look too bad. Revenue improved by 3.7% year-on-year excluding the exchange rate effect; automotive revenue (90% of total) was stable, up 1.2%. Renault Group 2024 H1 Results Presentation What stood out, given Renault’s past struggles, was profitability: group operating margin reached a record 8.1% and automotive operating margin 6.6%. Cash generation, as a result of positive operating performance, was another highlight. Free cash flow reached €1.3bn and the group’s net cash hit a historic high of €4.9bn. Renault’s monetizing of its Nissan shares is progressing. The latest disposal in March brought €358mn in cash (along with a capital loss of €440mn). The management continues to stress Nissan holdings for deleveraging — an area in which the group is improving but still has a ways to go. Building up cash reserves is not only helping the company make its way back to an investment grade rating, but also allowing it to keep investing in efficiency, including reorganization (mainly spin-offs Ampere and Horse) and AI processes.   Renault Group 2024 H1 Results Presentation Renaulution Economizing has become a group-wide mission. Production times and costs have come down already, development phase by 40% and industrial phase by 30%. For example, the new Twingo will be built in less than two years (instead of the standard 3-4 years) thanks to resource-saving tweaks to things like carryover parts and software.   Renault Group 2024 H1 Results Presentation Since the start of the transformation project in 2021, Renault has halved capital spending and reached the original financial targets (group operating margin > 5%, automotive FCF €3bn, R&D/revenue 8-9%) in advance. The group’s up-and-coming Mobilize is worth a mention. Revenue from its financing services in 1H increased by 29% y-o-y which brought the segment’s contribution to overall turnover to 10% — the goal is to increase that to 20% by 2030. Outlook The outlook for 2024 is slightly more muted compared to the year before. Group operating margin has been set to 7.5% (2023 actual: 7.9%) and FCF to €2.5bn (€3bn). Most of the difference comes from the deconsolidation of Horse, Renault’s powertrain specialist, in May which has resulted in an additional monthly outlay (amortization plus margin) of €55mn. Aside from the impact of Horse (that is €330mn for the six months from July), 2H of 2024 is guided to be better than 1H in terms of operating performance. Headwinds Such optimism may be a bit premature. Although plenty of new models are in the lineup (12 by end-2024) and plant utilization is high (over 90%), the orderbook is a humble 2.6 months (versus historical industry averages). And it is only this high in Europe, Renault’s largest market contributing more than 70% of revenue. That market has struggled of late. Unlike 2023 which saw double-digit growth numbers, 2024 has been tepid. In the eight months, new car registrations added just 1.4% (France and Germany recorded negative -0.5% and -0.3%). August was the worst month so far, with new car registrations down 18.3% across the European Union (-24% in France and -27.8% in Germany). Most concerning is the declining interest in electric vehicles, with BEVs losing share for four months in a row, to 14% in August versus 21% the year before.   New EU car registrations (European Automobile Manufacturers’ Association)  New EU car registrations by power source in August 2024 (European Automobile Manufacturers’ Association) Though margins in Europe are normally higher, like other traditional OEMs Renault is confronted with numerous challenges, from macroeconomic weakness to Chinese competition. Car registrations under the Group’s brands (Renault, Dacia and Alpine) fell 14% in August, with little y-o-y change in the eight-month period. Highest selling Volkswagen (OTCPK:VWAGY) and Stellantis (STLA) brands were up 1.6% and down 3.2% respectively from January to August. New registrations within Hyundai Group, in fourth place after Renault, slipped 4.3%. Rounding out the top five, Toyota climbed 17.9%. It was no coincidence that hybrid electric vehicles increased their share of registrations by 21% y-o-y in the same period to 29.8%. (HEVs were also the only category to grow registrations in August, +6.6% EU-wide and +12.5% in France.) Valuation RNSDF is trading at a trailing P/E of 7.9x and a trailing EV/EBITDA of 10.9x. Both multiples make Renault more expensive than top European competitors Volkswagen and Stellantis. Forward EV/EBITDA too is higher for Renault which possibly corresponds to stronger EBITDA growth prospects. Renault has also done better in terms shareholder returns.          Multiples RNSDF VWAGY STLA GELYF   P/E GAAP (TTM) 7.97 3.25 3.17 7.00   EV/EBITDA (TTM) 10.90 10.01 1.65 11.43   EV/EBITDA (FWD) 8.33 7.23 1.48 4.23   EBITDA Growth (FWD) 8.60% 3.63% -4.08% 18.25%   Click to enlarge Source: Seeking Alpha as of 27 September          Total return RNSDF VWAGY STLA GELYF   3M -7.2% -7.2% -24.0% 28.5%   YTD 33.7% -6.7% -28.3% 34.6%   3Y 68.6% -51.9% -0.1% -46.7%   5Y -1.6% -6.7% 86.9% 0.18%   Click to enlarge Source: Seeking Alpha as of 27 September Compared to Horse partner Geely (OTCPK:GELYF), a Chinese automaker with whom Renault shares a similarity in terms of diversification in powertrains, RNSDF loses out on both valuation and growth. Conclusion Renault as a group seems well-positioned to navigate this transitional period in electrification. Its combustion-powered and hybrid models act as \"a safety net for the group\", supported by Horse. Meanwhile, EV software pure player Ampere will make sure the automaker is amply prepared for a time when the EV market eventually returns to growth. By then, assuming it maintains its current pace, Renault Group may become financially ready too, with improved fundamentals, most importantly sustainable profitability and strong balance sheet. For now, there is much work left to be done, so it barely deserves a premium over peers.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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