Renault: Turnaround Progresses With Solid Revenue Gain on Volume, Price, and Mix

No-moat Renault RNO reported first-half earnings per share of EUR 7.59, up EUR 5.28 compared with the prior year and slightly better than we had expected. Group revenue of EUR 26.8 billion was up 27% from the prior year, but, excluding unfavorable currency, revenue jumped 30%. Automotive revenue was also 30% higher excluding currency. The “Renaulution” turnaround plan to improve pricing and mix supported 12 percentage points of the automotive revenue increase. Because the chip shortage was more acute in the year-ago period, volume added 15 percentage points. The French automaker discloses only revenue in the first and third quarters while full financial statements are reported for the half and full year.

Turnaround initiatives also displayed progress in second-half group operating profit which was EUR 2.0 billion with a margin of 7.6% versus EUR 1.0 billion and 4.7% reported a year ago. While volume contributed EUR 763 to operating profit, turnaround efforts on price and mix contributed EUR 1.8 billion, partially offset by production disruption and inflationary cost pressures. As a result, free cash flow was EUR 1.8 billion compared with EUR 1.0 billion in the first-half last year.

Management’s 2023 guidance was unchanged from the increase announced on June 29 including operating margin of 7%-8% and free cash flow of at least EUR 2.5 billion. 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%, the low end of management guidance, due to uncertainties from the chip shortage, Ukraine crisis, and possible recession in major auto markets for the remainder of the year.

We raised our fair value estimate to EUR 87 from EUR 86 due to the time value money since our last update. Renault shares currently trade at a steep 54% discount to our new fair value. In our opinion, for patient long-term investors willing to accept turnaround execution risk, this 5-star-rated stock is attractively valued.