Renault: Raises 2023 Guidance as Turnaround Takes Root but Delays Ampere IPO Until 1H 2024

No-moat-rated Renault RNO raised its 2023 guidance from at least 6% operating margin and at least EUR 2.0 billion in automotive operational free cash flow to 7%-8% margin and at least EUR 2.5 billion cash flow. Management said the improved outlook was attributable to the turnaround plan, focusing on value over volume. The firm said that pricing and product mix as well as variable cost increases have been more favorable than expected. New guidance assumes the same volume as the previous, with Europe up low-single digits while Eurasia and Latin America are flat, respectively.

We model a 6% increase in 2023 revenue on 2% higher volume and a 4% bump in average revenue per unit. We also assume group margin at 7%, up from 6% but still at the low end of management guidance, due to uncertainties from the chip shortage, Ukraine crisis, and possible recession in major auto markets. We raised our fair value estimate to EUR 86 from EUR 83 with EUR 2 coming from the time value of money since our last update and EUR 1 coming from changes to our model. For patient investors willing to accept the risk of a turnaround situation, the 5-star-rated shares of Renault offer compelling value, trading at a 54% discount to our new fair value estimate.

Management also said that the separation of Horse (internal combustion engine), Power (Renault Group ICE and hybrid vehicles), and Ampere (EVs and software) is on track. However, management believes that the “most favorable window for an initial public offering” will probably be in the first half of 2024. Original IPO timing was second-half 2023, but we think challenges in talks with Nissan, which management expects to take a 15% stake in Ampere, are the likely reason for the delay. Nissan’s management upheaval continued this past week with the sudden departure of COO Ashwani Gupta. Media speculation from outlets such as Reuters has been that conduct was in question, and that there was dissension in some aspects of the new alliance with Renault.