THE TRIBUNE – The automotive sector has collapsed on the stock market. In one month, the shares of manufacturers and major OEMs have fallen by an average of one third of their value. Does the situation really require it?
Frédéric Rozier – Yes, the situation is catastrophic. In France the market fell by 72% in the first quarter. In the United States, the decline is 38% even though the country entered containment much later. The automotive sector is one of the three sectors most affected by the coronavirus crisis with the banking and tourism sector. And the impact is fairly homogeneous, few values are distinguished by its resilience at the moment in sales figures. We expect a 30% decline in the first half of the year in the global market as a whole, as well as revisions to financial targets of around 50%. Europe could be more marked. In general, the level of uncertainty in the sector is extremely high. We have to be very careful.
Manufacturers are preparing for a containment exit, and are hoping for a rebound in the second half. Isn’t this prospect an opportunity?
There is a consensus that the second half of the year should be the rebound, but it will be gradual. It is estimated that the market could grow by 10%, and that it will be in 2021 that this will accelerate. To model this forecast, we look at how the recovery in China is going, but also what were the levers of recovery during the 2008-2009 crisis. What we are seeing is that while 90% of dealers in China are open, attendance is still 50% lower than it was before the coronavirus crisis. There is still a need for a catalyst for consumers to start buying again. What the 2008-2009 crisis tells us is that the recovery was extremely strong at the time thanks to the Chinese market, but also that manufacturers were already very weakened before they entered the crisis, which is not the case today.
So the fundamentals of the sector are stronger than they were ten years ago?
Yes. The issue that will concern manufacturers in the context of a shutdown is their cash flow. No builder seems to be in a critical situation from this point of view. German manufacturers are probably the strongest. To a lesser extent, PSA is also well armed. Renault, whose cash flow issues have been much talked about in recent months, also has enough cash, especially since it has no short-term bond commitment. So overall, the automotive sector has the backbone to hold the first half of the year in the event of no turnover.
Apart from the cash aspect, how do French car manufacturers fit into this crisis?
Renault could benefit from its much more advanced internationalization than PSA’s. For example, Renault is very well positioned in Russia which is not yet affected by the coronavirus crisis. With its ally Nissan, it can also benefit from the restart of the Chinese market… This exposure in different markets helps to break down the impact of the crisis. On the PSA side, the current crisis raises mainly questions about the terms of its merger with FCA. We have no doubts about the value of the merger, but given the large financial variations, particularly on the exchange of securities on both sides, the financial terms have changed considerably.
Among OEMs, a value decreases less than the others, it is Michelin…
Michelin is a bit of our favorite value. In general, tyre manufacturers are very resilient in times of crisis, because while dealers are often deserted, this is never the case for garage owners, and the second-mount market remains important. That’s what makes tyre makers resilient. They proved it in 2008-09. But this is even more true for Michelin thanks to its excellent pricing power, which will preserve its cash-flow generation.
What about other automotive OEMs?
Here we will be more attentive to the debt-to-ebitda ratio. And from this point of view, Plastic Omnium stands out a bit, because historically, the Burelle family has always resorted very little to debt. On the other hand, Valeo could be more exposed, but overall the fundamentals are sound.
What are the upcoming events that should be monitored in the sector?
We will have to look closely at the inventory level, because there has been a bit of production and stock. As a result, there is likely to be a destocking effect that will delay the economic recovery. We will have to look at public market support schemes, but we are not expecting anything until September, it is likely that the market will wake up before. But the main marker to watch is the tempo of the exit from the crisis, it is the main source of uncertainty, and the market hates uncertainty. We are not yet certain that the peak of the crisis has passed, so it cannot be ruled out that prices are still losing 10 or 15% valuation. What we must keep in mind is that the horizon is not the year 2020, which is now a lost year, but 2021 which should be the real year of rebound, if there is a rebound. In July and August, during the half-year results, it will be necessary to look at the objectives and forecasts of manufacturers and to see if they are also on a rebound trajectory.
Do you think the sector will be able to return to pre-crisis valuation levels, or will there be consequences?
After coronavirus could quite accelerate the transformation of the relationship to mobility. It is not at all certain that the dynamism of the past will be reflected. There is now a glass ceiling on the area.
