Morningstar | Renault Reports Record 1H Revenue and Operating Margin; Maintaining EUR 88 FVE
No-moat-rated Renault reported first-half earnings per share of EUR 7.18, missing the consensus EPS estimate of EUR 7.54 by EUR 0.36 and EUR 1.59 below the year-ago first-half result. The miss was attributable to lower Nissan Joint Venture equity income contribution, down EUR 483 million to EUR 805 from EUR 1.3 billion last year. Even so, record first-half revenue was EUR 30.0 billion, up 0.2% from EUR 29.5 reported for the first half of 2017. Excluding the negative impact from currency translation and geographic mix, revenue would have increased 6.8%. Renault reported that volume and pricing contributed 3.1 and 1.2 percentage points, respectively, to the revenue increase at constant currency.Group EBIT for the first half of 2018 was EUR 1.9 billion, increasing 5.2% versus EUR 1.8 billion reported in the prior year. Despite a 0.9 percentage point increase in automotive R&D as a percentage of automotive sales to 6.1%, group EBIT margin expanded 20 basis points to a first-half record of 6.4% on cost savings from Monozukuri (Renault's lean manufacturing initiative) and a favorable product mix.
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 16% 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.
Global volume in the first half grew at a healthy 10%, due a 70% jump in the AsiaPacific units to 170,000 as the company continues to penetrate the market. The Americas region saw an 18% pop in volume as Brazil also continued to recover from trough demand levels. Eurasia region volumes rose 15% as AvtoVAZ sales of Lada brand models were strong on Russian demand recovery. European volume remained healthy in the quarter, rising 4% over the first half of 2017.
Management confirmed full-year 2018 guidance with a global increase of 2.5% in light vehicle demand and European demand to increase by 1%. The European automotive demand outlook appears slightly weak to us, with our full-year forecast for European light vehicle registrations up 2% to 4% to plateau levels previously seen in 2007. However, management operating margin guidance included a specific target to maintain at least a 6% level for the full year. Our model is slightly below management's target, at an estimated 5.9%. Renault also expects to have positive automotive operational cash flow, but as usual did not provide a number. However, first-half 2018 automotive free cash flow was EUR 418 million, jumping 17% compared with EUR 358 last year.
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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