Exhaustion of pent-up demand could pressure carmaker's margin and cash in H2, says Bloomberg Intelligence

Exhaustion of pent-up demand could pressure carmaker’s margin and cash in H2, says Bloomberg Intelligence

Time Stamp: July 21, 2023 3:00 AM
Source Node: 2180845

A new automotive sector report from Bloomberg Intelligence (BI) states that the exhaustion of pent-up demand could pressure EU automakers’ margin and free cash in H2.

Strong pricing and restructuring have boosted these metrics since the pandemic, feeding ambitious electric-vehicle spending, €60 billion-plus (£52bn) buy backs and high-single-digit dividend yields amid historically low valuations.

European automakers are resorting to buybacks and increased dividends to boost shareholder returns amid historically low valuations. Balance sheets are still flush with cash thanks to strong post-pandemic pricing, with many prioritizing the production of their highest-margin vehicles amid supply constraints.

Michael Dean, senior autos analyst at Bloomberg Intelligence, said: “BMW, Mercedes and Stellantis have authorized buybacks of up to 10% of share capital (worth more than €60 billion, as of July 13), while Ferrari is on the third tranche of a €2bn programme. Collectively, these companies spent €3.8bn in the past 12 months.

“After a solid H1 with strong pricing embedded into order backlogs and volume recovering from recession-like lows, the sector remains confident that free cash flow will remain robust in 2023.”

VW liquidity boost means no rush for Lamborghini IPO

Volkswagen’s IPO of Porsche AG in September 2022 was a success, notes BI, though its remaining 75% stake has yet to be reflected in its valuation, given the company is unlikely to crystallize that stake by selling down its preference-share holding further.

The latter wouldn’t affect VW’s control of the luxury brand but could improve the free float.

With the IPO boosting industrial liquidity to €38 billion in Q1, the need for a cash boost from a potential Lamborghini IPO – which may reach €20 billion, based on BI’s calculations – appears limited.

Indeed, notes BI, that was the tone adopted by CEO Oliver Blume at the June 21 capital markets day, when he discussed the Brand Progressive division, which includes Audi, Lamborghini and Bentley. Porsche and Mercedes have overtaken VW in terms of market capitalization this year.

Capital intensity persists amid the transition to BEVs

Global vehicle sales are expected to climb in 2023-24, based on consensus, though remain significantly below pre-pandemic levels due to looming recessions in key markets. That’s despite easing supply-chain constraints.

Dean added: “A modest volume recovery will aid price discipline but may hinder European automakers’ ability to meet ambitious mid-decade targets for the BEV sales mix, given there’s limited incentive to sell lower-margin BEVs above those needed to achieve emissions aims.

“Capital spending increased in 2022 and is anticipated to stay elevated in 2023 (at 5.7% of sales, in line with 2019) as peers revamp vehicle portfolios and vertically integrate supply chains to fend off competition from new US and Chinese EV entrants.”

Besides the transition to BEVs, BI said EU automakers are allocating more capital to meet their software goals.

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