Renault Investors Like Results, Dividend Restoration And Nissan Alliance Changes

Renault‘s share price is still riding high after changes to the alliance with Nissan, an update to its strategic plan and its latest financial results, although it still must grapple with expected sales weakness in its core European market.

Fitch Ratings announced raised its view on some of Renault’s long-term debt to stable.

“The upgrade reflects the strengthening of Renault’s profitability and balance sheet flexibility following its strategic plan update. We forecast that Renault’s automotive EBIT (earnings before interest and tax) will be above 3% in our four-year forecast horizon, which is above our positive rating sensitivities and the 2% median in our navigator for the (“stable”) rating category,” Fitch said in report.

“The Ampere (Renault’s battery electric vehicle and software unit flotation) and potential sale of Nissan shares provide a cash buffer, which we assume will be directed primarily to internal investment needs for rapid electric transition. We view the announced cash allocation strategy as conservative, which is the main rating driver of the upgrade,” Fitch said.

Renault restored a dividend for the first time in 4 years, although it reported a loss because of the forced sale of its Russian subsidiary AvtoVaz. Net income before the disposal of AvtoVaz rose €1.1 billion from 2021 to €1.6 billion last year. Renault’s operating margin in 2022 doubled from the previous year to 5.6%. In May, Renault wrote-off €2.3 billion from selling its Moscow factory and stake in AvtoVaz

Renault and Nissan agreed a new framework deal to modernize their alliance which included the French company reducing its 43% holding in Nissan to 15% while the Japanese company’s 15% stake in Renault would gain voting rights. France has a 15% stake in Renault. The balance of Renault’s shares would be placed in a trust.

Renault CEO Luca De Meo’s “Renaulution” strategic plan will split the company into five autonomous operations. The plan includes raising operating profit margins to 8% by 2025, and to more than 10% in 2030, compared with 5% expected this year.

Berenberg Bank of Hamburg, Germany, described Renault’s turnaround plan as an example of “flawless execution” and expected more progress in 2023. It said Renault’s new product launches are well-timed.

“We acknowledge that weakening consumer discretionary spending is likely to negatively affect “volume” (manufacturers) such as Renault, more than “premium” (manufacturers). However, Renault’s strong self-help potential should protect its margins and cash generation, enabling margins to gradually move into line with most of its peer group, while others’ margins are generally expected to contract as the cycle turns,” Berenberg Bank said in a report.

New models include the Austral, a compact SUV replacing the Kadjar, which is aimed upmarket to compete with the BMW X3, an ambition shared with its probable competitors like the Peugeot 3008 and Toyota RAV4. There is a face-lift planned for the small but big-selling Clio this year.

Renault has big electric ambitions too, with plans to spin off its electric car-making, which now include the Megane E-Tech as well as the long-serving Renault Zoe. An electric Renault 5 is on the drawing board for launch in 2024, along with a revival of the classic little 4. Renault has said it will be building more than one million battery electric vehicles (BEV) a year by 2025. These new vehicles will command better profits and the company will benefit from a much lower breakeven point.

The trouble is, even a company with an impressive plan can’t buck negative trends, says Fitch

“Although we expect pricing conditions to be more challenging in 2023, especially in the European market, we believe easing raw material prices and improving supply chain conditions should mitigate our expectation of a continued inflationary environment and weakening in consumer sentiment. We forecast Renault’s auto margin to be around 4% over our forecast period,” Fitch said.

Renault’s share price has almost doubled over the last 12 months from a low of just under €23.0 to a peak of €43.50 on February 16. Since then it has slid a bit to just under €41.00.