PSA to Boost Its FY18 Dividend 50%, Renault Dividend Yield at a Five-Year High Tuesday, October 2Nd 2018

PSA to boost its FY18 dividend 50%, Renault dividend yield at a five-year high Tuesday, October 2nd 2018

PSA and Renault posted strong 1H18 results and confirmed their 2018 outlook unlike some other European carmakers

• We expect PSA to boost its FY18 dividend by 50%

• Renault forecast dividend yield is at a five-year high

• We project dividends from French carmakers to grow CAGR 12% over next four years vs. 6% for the three German carmakers. European automobiles stocks have been under pressure over recent months against the backdrop of escalating international trade tensions. While the Stoxx Europe 600 is down 2% Year-To-Date (YTD), its automobiles sector sub-index is dropping 13% YTD. In France, Renault’s share price is down 12% YTD, but PSA is up 32%, after a sharp price increase following 1H18 results release. Despite challenges such as the global trade conflicts, the new emissions regulation known as WLTP, the currency volatility in emerging markets and the pulling-out of the Iranian market due to US sanctions, PSA and Renault confirmed their 2018 outlook at 1H18 amid strong results, while some other European carmakers revised their outlook downwards. Post 1H18 results, we have revised our dividend estimates upwards for PSA and now forecast the company to increase its dividend by 50% in FY18. While we expect a 7% dividend growth for Renault, our forecast dividend yield of 5.1% stands at a five-year high compared to 3.5% for PSA. Over the next four years, we forecast aggregate dividend estimates from the two French carmakers to increase CAGR 12% vs. 8% for France CAC 40 and 6% for German carmakers.

1.4 1.2 Payout 1 FY18e DPS Div Yield ratio 0.8 0.6 PSA €0.80 3.5% 25% 0.4 RNO €3.80 5.1% 25%

Aggregate Aggregate 0.2

dividend€Bn 0 2016 2017 2018e 2019e 2020e 2021e Source: IHS Markit, FactSet.

PSA RNO

Operating performance and margin Record operating margin in PCD, OV back to profit At 1H18, PSA posted an 8.5% recurring operating margin at Peugeot/Citroen/DS (PCD) after 7.3% in FY17 and ahead of its strategic plan targets − namely margin over 4.5% on average in 2016-18, and over 6% in 2021. The profitability was due to a positive product mix (SUV models) and cost reductions offsetting negative impact from forex and input costs. This was coupled with a 5% positive margin at Opel/Vauxhall (OV) after -2.5% in August-December 2017. OV’s turnaround was driven by cost reduction and better pricing. PSA targets for OV 2% recurring operating margin by 2020, 6% by 2026. 1H18 results triggered an upwards revision of earnings estimates from the consensus. FY18 EBIT are now forecast to increase 20% in PCD (margins above 8%) and to be positive in OV (margins of 5%). While forex and input costs could continue to have a negative impact in H2, operating profit should benefit from product mix (SUVs product offensive). SUVs’ sales are expected by IHS Markit to increase 36% and represent almost 30% of Group’ vehicle sales in 2018. Renault’s operating performance improves despite headwinds At 1H18, Renault reported a 5% increase in group operating profit with a 6.4% margin and confirmed its 2018 outlook, namely a margin above 6%. Cost savings (Monozukuri), volume, Avtovaz and prices increases in emerging markets more than offset forex and raw material negative impact. However, operating profit in the core automotive division (excluding Avtovaz) slipped 6% with margin of 4.5% compared to 4.8% in 1H17. Post 1H18 results, the consensus revised downwards automotive operating profit (excluding Avtovaz) but raised estimates for Avtovaz and sales financing. For FY18, the consensus expects Group EBIT to decrease 2% and margin to stand at 6.3% after 6.6% in FY17. While Renault is facing same headwinds as Peugeot (forex, raw material), the management expects cost savings to exceed €500m for the full year (€254m at H1) and to continue benefiting from prices increase in emerging markets. EBIT margin trend: PSA vs. Renault At 1H18, PSA’s automotive division (PCD + OV) posted a 7.4% operating margin vs. 4.7% for Renault (including Avotvaz).

9.0% 7.0% 5.0% 3.0% 1.0% -1.0% -3.0% -5.0%

PCD + OV RNO + Avtovaz

Source: Company, FactSet.

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The geographic mix is a key factor in explaining the margin difference between the two French carmakers. At 1H18, Europe accounted for 52% of Renault’s total units sales vs. 77% for PSA.

Source: Company. Whilst the margins are higher in Europe, Renault is also more exposed to currency volatility (emerging markets). At 1H18, Renault reported a negative effect of €347m on automotive operating profit (excluding Avtovaz) while PSA reported a €220m negative impact on PCD operating earnings. However, due to this country mix, Renault should benefit from a positive volume effect on its earnings. At 1H18, Renault posted a 5.3% increase in vehicle sales compared to +1.9% for PSA (excluding OV). Over the next 4 years, IHS Markit expects Renault’s total vehicle sales (including Avtovaz) to increase CAGR 3.5% while PSA’s sales (PCD + OV) are expected to remain nearly flat. PSA and Renault remain exposed to a downturn in the European auto cycle. IHS Markit forecast the West Europe region to represent 67% of PSA’s total vehicle sales in 2018, and 46% for Renault. In addition, PSA and Renault face regulatory uncertainties in Europe, in particular with the new emissions standards known as WLTP. In September, BMW revised downwards its 2018 outlook, blaming the significant supply distortions in several European markets and an unexpected intense competition due to this regulation. PSA’s management is confident that it should not be impacted by the switch to WLTP in Europe in H2 unlike some of its rivals, and Renault does not anticipate significant negative impacts on its business in H2, but highlighted potential risks regarding consumer reaction and competitors’ behaviour due to this new regulation.

Dividend estimates PSA to boost its FY18 dividend 50% Following strong 1H18 results, we have raised our dividend estimates from €0.70 per share to €0.80 per share for FY18. It reflects a dividend increase of 50% and a payout ratio around 25% of earnings per share estimates in line with PSA’s dividend policy resumed in FY16. PSA is forecast to deliver the biggest dividend growth among France SBF120 for FY18 but also compared to other European carmakers. At 1H18, PSA group reported a net income, Group share of €1,481m, up €226m. Non- recurring operating expenses were significant at €750m (Iran impact, restructuring costs at OV division). Management expects less impact from exceptional items in the second half of 2018 on net profit. The consensus expects an increase of more than 60% in net profit in FY18 (+18% in 1H18). From FY18 to FY20, we forecast dividends to

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increase in line with underlying EPS growth estimates from the consensus, i.e CAGR +20%. Renault’s dividend yield stand at a five-year high As per the new dividend policy announced in October 2017, Renault intends to distribute 100% of dividends received from listed companies (Nissan and Daimler) and targets an increased payout ratio on core net profit (Group Net Result – Associates) from 7% in 2016 to 15% in 2022. For FY18, we expect Renault to distribute a dividend of €3.8 per share, up 7%. Our forecast is based on the dividends from listed companies to be received in calendar 2018 (Renault reported €422m from listed companies at 1H18 and we expect Nissan to pay an interim FY19 dividend of JPY28.5 per share or €400m at the current exchange rate). Additionally, we factor a payout ratio around 12% to core net Profit: Group net result estimates minus Associates (€814m reported at 1H18 and composed mainly by Nissan). For FY18, the aggregate amount would thus be around €1.1bn or €3.8 per share. We also expect Renault to maintain a payout ratio in line with past years between 20%-25%. Our FY18 dividend estimates reflects a dividend yield at a five-year high for Renault

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018e RNO Yield 2.9% 3.1% 2.6% 3.7% 4.2% 5.1% PSA Yield 0.0% 0.0% 0.0% 3.1% 3.1% 3.5% CAC 40 Yield 3.1% 3.1% 3.4% 3.1% 2.9% 3.3% SBF 120 Yield 2.6% 2.6% 2.7% 2.7% 2.5% 2.9%

Source: IHS Markit, FactSet. Month-end dividend yield at six-year high

6.0% 5.0% 4.0% 3.0% 2.0% 1.0%

Source: IHS Markit, FactSet. Renault trades with a 5.1% dividend yield based on our FY18 dividend estimates of €3.8 per share. The last time Renault returned this level of dividend yield was May 2012. Only Daimler currently trades at a higher dividend yield than Renault (6.7%).

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In addition, Renault trades at 5.0x 2018 EPS estimates from the consensus of €15.15 which is below average of last 5 years of 7.2x EPS. In comparison, PSA trades at 6.8x 2018 EPS estimates with a share price now at a seven-year high.

Valuation Metrics RNO 2013 2014 2015 2016 2017 5 yrs avg 2018e 2019e 2020e P/E na 8.7 8.9 6.7 4.4 7.2 4.9 4.6 4.7 EV/Sales 0.37 0.37 0.54 0.43 0.36 0.41 0.31 0.29 0.29 EV/EBITDA 4.0 3.6 4.9 3.6 3.2 3.9 2.7 2.6 2.5 EV/EBIT 12.3 9.4 10.5 6.7 5.5 8.9 4.8 4.5 4.4

Source: FactSet.

Cashflow and debt

2013 2014 2015 2016 2017 2018e 2019e PSA dividend cash outflow 0 0 0 408 474 715 804 FCF dividend cover NA NA NA 4.0 2.4 4.4 2.9 Net debt / EBITDA 1.9 -0.2 -0.9 -1.2 -0.9 -1.0 -1.1 RNO dividend cash outflow 502 543 701 917 1027 1099 1186 FCF dividend cover 2.6 2.6 2.3 2.0 1.5 1.4 1.2 Net debt / EBITDA -0.5 -0.5 -0.5 -0.5 -0.4 -0.5 -0.6

Source: IHS Markit, FactSet.

PSA has a clear lead in generating free cash flow At 1H18, PSA Group generated €2.03bn of operational free cash flow (cash flows generated by operations net of investing activities excluding non-recurring items) at PCD (including Faurecia) and €1.16bn at OV (as per PSA’s strategic plan for OV, the management expects to deliver a positive operational free cash flow by 2020), while Renault reported €418m of automotive operational free cash flow (as per Renault’s 2018 outlook, the management targets a positive automotive operational free cash flow). PSA Group’s free cash flows are expected by the consensus to reach €3.2bn in FY18 covering our dividend estimates more than 4x, compared to €1.6bn for Renault and a dividend cover of 1.4x. At 1H18, PSA posted a net cash position of €8.9bn in the auto segment. Renault reported an automotive net financial position of €3.1bn. The balance sheet is expected to remain strong for the two companies. The consensus forecast the two French carmakers to report a net cash position over the next four years.

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Contacts: Jonathan Chatelain Dividend Forecasting +44 20 7064 6021 [email protected]

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