Morningstar | Renault Full-Year 2018 Results Solid Despite Headwinds; Maintaining EUR 88 FVE
No-moat-rated Renault reported full-year diluted earnings per share before special items, or EPS, of EUR 14.03, better than the consensus EPS estimate of EUR 13.94 by EUR 0.09 but EUR 1.28 below the year ago result. Lower results versus full-year 2017 were attributable to lower Nissan JV equity income contribution, down EUR 261 million to EUR 1.5 billion from EUR 1.8 billion, negative currency translation, higher raw material costs, and WLTP in Europe. Even so, record unit volume reached 3.9 million, up 3.3% from 3.8 million reported in the prior year. Consolidated revenue declined 2.3% to EUR 57.4 billion but would have risen 2.5% excluding the negative impact of currency.Group EBIT margin was 6.3%, down 30 basis points from full-year 2017 but excluding higher raw material headwinds of EUR 356 million, margin would have expanded 70 basis points to 7.3% compared with full-year 2017. Adjusted automotive EBIT (including JV equity income and excluding special items) for full-year 2018 was EUR 4.5 billion, dropping 18% versus EUR 5.5 billion reported in the prior year. Automotive adjusted EBIT margin was 8.2%, down 150 basis points from 9.7% reported last year, due to lower Nissan equity income and increased raw material cost. Monozukuri, Renault's cost reduction program, partially offset headwinds, contributing EUR 421 million to 2018 automotive EBIT.
The French automaker discloses only revenue in the first and third fiscal quarters while full financial statements are published for the half- and full-year results. Currently trading at 32% discount to our EUR 88 fair value, we view the 4-star-rated shares of Renault as attractively priced relative to our forecast for cash flow and returns on invested capital.
Despite the negative impact of WLTP in Europe, global volume improved by 3%, due a 70% jump in the AsiaPacific units to 330,000 as the company continues to penetrate the market. Americas’ region saw a 12% increase in volume as Brazil continued to recover from trough demand levels, partially offset by dramatically lower Argentina volume. Eurasia region volume improved slightly by 2% as AvtoVAZ sales of Lada brand models in Russia jumped 19% to 398,000 units. European volume edged slightly higher by 0.5% on a 7% increase in Dacia brand models.
Management said that guidance for full-year 2019 includes "increased revenue" at constant currency, scope, and barring a no-deal Brexit. Group operating margin is expected to be "around 6%." Management also expects "positive" automotive operating free cash flow. Management also confirmed its "Drive the Future" 2022 targets or more than EUR 70 billion consolidated revenue, greater than 7% EBIT margin, and cumulative EUR 4.2 billion in Monozukuri cost savings. Our EUR 88 fair value estimate includes peak consolidated revenue of EUR 63.3 billion. Renault's, historical high, low and median adjusted EBIT margin was 9.7%, negative 7.8%, and 4.8%, respectively. Our normalized sustainable adjusted EBIT margin assumption is 4.3%, 50 basis points below the historical 10-year median.
Renault is an automobile manufacturer. Co.'s activities have been organized into two main business sectors, in more than 120 countries: Automotive and Sales Financing. Co. designs, develops and sells passenger cars and light commercial vehicles. Following the acquisition of Romanian carmaker Dacia and Samsung Motors' operating assets in South Korea, Co. has three automotive brands: Renault, Dacia and Samsung. RCI Banque, Co.'s captive financing arm, finances sales of the Renault, Renault Samsung Motors (RSM) and Dacia brands, and, in Europe, the Nissan and Infiniti brands. In addition to these two activities, Co. has equity investments in the following two companies: Nissan and AVTOVAZ.
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