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Renault (RNO FP): Leveraged Scale

Please click here to read the full report, for the speed readers, we’ve summarized our research in this one page.

In a Nutshell:

Throughout the European crisis, traders have ascribed a negative value to Renault’s underlying business, after backing out the value of its stakes in Nissan, AB Volvo (which it has since sold) and Daimler. That was probably warranted, as Renault had heavy exposure to abysmal European markets, a marginal volume business compared to peers, and an automotive debt position. All of this has changed, and as soon as Renault’s European operations started showing sustainable positive growth, investors were willing to give Renault’s business a positive value. This has since fallen to nearly zero, and investors are getting a company that will generate over €3 billion in free-cash-flow by 2016-2017 for free, and are also buying a position in Nissan at an industry-low valuation in the midst of its own growth plan. Both companies will benefit meaningfully from the harmonization of its vehicle platforms, such that over the next several years, roughly 80% of Renault’s volumes will be sold on platforms with similar scale (for both component and development costs) as the biggest in the industry (GM, VW, Toyota). This scale will bring significant cost savings to both companies, with more leverage on Renault’s side of the alliance, which will allow Renault to more than quintuple automotive operating income. Led by a very strong management, it’s the cheapest and lowest-risk play on both a European recovery and emerging market growth. Shares will do very will without either coming to fruition given the cost-savings plan. Should both companies deliver on their medium-term plans, Renault shares are a triple from current levels. Given the low valuation of Nissan’s shares currently, and the near-zero value being given to Renault, we think valuation can mitigate any macro risks that emerge.


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