Interactive Investor

Volkswagen hit could be €78bn, price target halved

2nd October 2015 11:45

Lee Wild from interactive investor

Just a quick one on Volkswagen (VOW3) Friday. Like fellow punchbag Glencore, shares in VW remain incredibly volatile, short-sellers loving the prospect of massive fines, lawsuits and reputational damage, and buyers betting that the shares are oversold. In the aftermath of the emissions cheat scandal, analysts cut estimates but remained largely positive. Now, Credit Suisse has burned the midnight oil and come to some dramatic conclusions.

As VW chiefs prepare to testify before US politicians next week, and after its supervisory board claimed it would take "at least several months" to complete investigations, the broker repeats its 'underperform' rating but axes its price target from €169 to just €82.

(Click to enlarge)

"The market does not appear to be discounting negative knock-on effects," it claims. "The outcome for recall costs and fines is unclear and largely depends on the engine performance post repair."

Credit Suisse examines a number of scenarios, which put estimated total costs at anywhere between €23 billion and €78 billion. The higher figure pencils in harsher civil and criminal penalties, an expensive hardware refit on cars and a fall in demand for vehicles as a result of reputational damage. Put in context, net profit is put at just €7 billion in 2016, down 26%.

(Click to enlarge)

*RV is residual value (or second-hand price)

"We increasingly see risk in VW's Financial Services [FS] business which supported industrial growth in the past," adds Credit Suisse. "Higher refinancing costs and risk provisioning makes it difficult for the FS to fund itself going forward; thus a capital injection would likely be required unless growth is reduced materially."

And there's an inevitable impact on underlying earnings per share (EPS) estimates, reflecting lower volume and price assumptions. After a modest hit this year, forecasts for 2016 slump by 29% to €14.14 a share, then by a third in 2017 to just €13.69. The VW brand is tipped by the broker to lose money for the next two years as prices fall and carbuyers go elsewhere.

That new price target of €82 reflects a ratio of 9 times EPS estimates for 2016, but a best-case scenario in terms of fines at €23 billion.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.