Renault’s Turnaround Shows in Second-Half Results

No-moat Renault reported second-half diluted EPS from continuing operations (discontinued AvtoVAZ and other Russian operations), or EPS, of EUR 3.71, beating the EUR 3.58 FactSet consensus by EUR 0.13 and the year-ago EPS of EUR 2.62 by EUR 1.09. Despite Ukraine crisis and chip crunch volume losses, bottom line performance was aided by improved pricing and mix, and turnaround cost reduction efforts. The French automaker discloses only revenue in the first and third quarters, while full financials are published for half- and full year.

We reduced our fair value estimate by EUR 1 to EUR 82. Time value of money added EUR 3 but a weaker Japanese yen, which reduces estimated Nissan equity income contribution, subtracted EUR 4. For patient long-term investors willing to accept the risk of a turnaround, the 5-star-rated shares trade at a compelling 47% discount to our new fair value.

Despite second-half volume plunging 18%, consolidated revenue was up by 10% to EUR 25.3 billion, beating the consensus by 9%. The difference between changes in volume and revenue was due mainly to positive pricing and mix as Renault’s turnaround emphasizes value over volume. Despite production disruption and inflationary cost pressures, turnaround cost initiatives also displayed progress as second-half group operating profit was EUR 1.6 billion with a margin of 6.4% versus EUR 1.0 billion and 4.4% reported a year ago, topping the consensus by 16%. As a result, free cash flow was EUR 2.0 billion compared with EUR 1.6 billion in the second half last year.

Management guided to 2023 operating margin of 6% or better and free cash flow of at least EUR 2.0 billion. We estimate that between production volume improvement, strong pricing, and increasingly favorable mix, 2023 consolidated revenue rises 12% to EUR 52.3 billion. However, we also assume a 6% operating margin, at the low end of guidance, as some risk of output disruptions remains.