Renault M&A Would Help Stem Profit Bleed

“After me, the flood”. The apocryphal phrase attributed to the defeated King Louis XV of France could well have been uttered by the recently defenestrated chief executive of Renault (RNLSY). On Thursday evening the 14 billion euro French carmaker announced a whopping profit warning barely a week after Thierry Bolloré’s sudden departure. Faced with weakening demand, the cost savings from combining with Nissan Motor (NSANY) or Fiat Chrysler Automobiles (FCAU) would help mitigate rapidly shrinking earnings.

Interim CEO Clotilde Delbos has two problems. One is falling sales: Full-year revenue is now expected to be 3-4% lower than last year, rather than merely flat. The other is worsening profitability: The carmaker cut its forecast operating margin by a percentage point to 5% due to higher development and compliance costs. The combined result is a one-fifth reduction in implied 2019 operating profit to 2.7 billion euros, based on Breakingviews calculations using Refinitiv data. For good measure, Delbos added that Renault may not generate any free cash flow this year. Shareholders may therefore have to take a hefty dividend cut to boot.

So far, so terrible, although arguably the company can do little about a sluggish global economy. Lower demand for automobiles, especially in Europe, was also the reason why shares in rival Peugeot initially fell by 3% on Friday.

Higher expenses are a bigger problem. Delbos mostly attributes rising costs to regulation – read: European Union CO2 emissions rules due to kick in next year. Deutsche Bank analysts reckon the incremental expense equates to 400 million euros this year. Given the need for cleaner engines, these costs are unlikely to fall off soon. Unless Delbos can successfully pass them on to belt-tightening European consumers, Renault’s already shaky operating margin is vulnerable to further collapse. Assuming it remains constant from the half year, rival Peugeot’s margin will be almost four percentage points higher.

1 2
View single page >> |

All names and marks owned by Thomson Reuters, including "Thomson", "Reuters" and the Kinesis logo are used under license from Thomson Reuters and its affiliated companies.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.