17 March 2020 by jbchevrel
The VW CDS was closed 71bp on Feb 21st. on a close-to-close basis, it has reached a peak of 200bp (+129) on March 16 and today we slightly reverted tighter 195bp (+124) from that. Meanwhile the Main close 43bp on feb 21st went close to 140bp (+97) in intraday and closed 118bp (+75) today. The China impact and the COVID impact are obviously the bigger factors for VW, and explain most of the build in risk premium displayed in CDS over the past few weeks. Today, VW reported their full results for 2019. These were okay, but the stock hit the lowest in 4.5y as all the focus is now on to what extent COVID will dent 2020. Previously VW had released a preliminary statement summarising the 2019 results and trading outlook. As we already knew, 2019 pre-exceptional EBIT came in +3-4% north consensus and up by +13% YoY at €19.3b, displaying a 7.6% pre-ex EBIT margin, up +30bp YoY. Unit sales have increased by +1.3% YoY during the full year 2019. The % share of profit from its Chinese JVs came down moderately to €4.4b (23% of the total -- from €4.6b in full year 2018). To put things in their context, this is not too bad in relative terms. For now. Indeed, the broader market had seen unit sales falling -9% YoY over the same period of time, for comparison. Now, that did not include exceptional costs. Those remain elevated but manageable, at €2.3b, and those have come down by about a third, from €3.2b in full year 2018. Cashflow is the one to look at, given the heavy CAPEX and R&D and large working capital swings. Full year 2019 gross auto FCF was +€13b before diesel negative amounting -€2b and M&A related negative amounting -€1b. So net Auto FCF is in the area of +€10b versus close to zero in 2018. Decent improvement there. For reference, in 2018 there had been -€7.4b of working capital. Net liquidity as of the end of 2019 was better by +€2b vs a year earlier, standing at €21b. Still solid. But as far as 2020 is concerned, VW said it’s almost impossible to predict the economic impact of the COVID, not exactly reassuring their investors. “The corona pandemic presents us with unknown operational and financial challenges,” CEO said. In its annual report, VW repeated their February forecast that it expected to deliver about as many vehicles worldwide in 2020 as it did in 2019. It also said that it would maintain a group and passenger car pre-exceptional EBIT margin of 6.5-7.5% (vs group at 7.6% in 2019) and a commercial vehicle EBIT margin of 4-5%. This sounds clearly subject to a COVID-related revision. Also, today a second order development came during the press conference. Indeed, VW CFO signalled they could back away from plans to acquire the rest of Navistar International Corp., sending shares of the U.S. truck manufacturer down. The $2.9b deal announced by VW’s heavy-truck unit Traton SE in January remains a “strategically a good idea” though, still according to VW CFO. It is just not the top priority at the moment, with COVID posing business risks, and safety risks for employees. The CFO repeated that his priority was to protect liquidity reserves and VW credit rating. Such a large China business will weigh on VW as soon as Q1-20. There was almost no activity there in February, due to COVID-related mandated shutdowns. Production is now restarting there, but now the question is who is going to buy those cars in EU/US. To this demand issue, another supply issue may come from Europe. In this very uncertain context, VW is meant to continue the shift from ICE to EVs, while the speed of customer take-up is still unknown. This is another risk.