We remain overweight on Valeo shares before they report their sales figure for the 1st quarter of 2018. We have a price target of €61.50 on the shares and remain of the view that Valeo should remain a core holding in a well-diversified portfolio.
The group has a leading position across its product portfolio and we are confident that mid-term revenue prospects are strong.
We believe that Valeo is well positioned to continue to benefit from future growth and see the current price as attractive.
The Valeo Group has set the following objectives:
• Nominal sales growth of around 8% for 2018;
• In 2018, like-for-like growth in original equipment sales of around 5%, accelerating in the second half ahead of expected double-digit growth in 2019;
• In 2018, operating margin excluding share in net earnings of equity-accounted companies (as a % of sales) in line with 2017, despite the recent rise in (i) raw material prices and (ii) the value of the euro against the main currencies to which the group is exposed.
Rationale to invest in Valeo:
• Attractive business model - Focuses mainly on CO2 reduction (fuel efficiency) and advanced driving solutions
• Cyclical sector - We are positive about the auto sector and expect further growth in years ahead
• Increasing its backlog - Valeo’s order backlog continues to increase
• Order intake - Valeo mentioned that they are seeing very strong order intake so far in FY18 and that they will leave us ‘surprised’ with the order intake number they report with 1H18 results
• On track with current plan - Valeo is already well ahead of the mid-point targets of the 2015-20 plan thanks to stronger than anticipated organic growth, margin improvements and cash generation in both 2015 and 2016
• Targeting new plan - Valeo rolled out its new 2017-21 financial plan focusing on higher R&D and capex lays the foundation for further growth beyond 2021
Main objectives from the new plan are to:
• Strongly outperform global light vehicle production by at least 7 points on average per year
• Target operating margin of 9% by 2021. At the moment it is 7.51%
• Increased spending on R&D and capex to stimulate growth. Margins will still increase because they plan on reducing other costs in the day-to-day management
• Increase acquisitions
• Targeting 30%+ dividend payout
Valuation
We have a price target on Valeo of €61.50, which was derived from our earnings based model. In our valuation we are assuming that the Groups attractive EBIT margins will be maintained going forward due the attractiveness of the products this company offers.
Conclusion
We are comfortable holding Valeo in a well-diversified portfolio. It is well positioned to continue to benefit from further growth in the auto industry as global economic growth continues to remain supportive.
About the company
Valeo SA manufactures automobile components. The Company manufactures clutches, engine cooling, parts, lighting, electrical systems, windshield wipers, motors and actuators, security systems, electronics, and connective systems for automobile manufacturers and the aftermarket. Valeo's products are sold in Europe, Asia, North America, and South America.
Disclaimer:
This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.