Fiat Chrysler Automobiles NV
Europe Equity Research 15 January 2015
Neutral
Fiat Chrysler Automobiles NV
FCHA.MI, FCA IM Price: €10.62
Solid mid-term plan, now it is time to deliver
▲ Price Target: €12.00 Previous: €8.00
FCA has laid out a clear path which it needs to execute over the next few years in order to improve profitability across NA, EU and Latam. We await signs of industrial improvement triggering share price rerating. We remain Neutral and set our Dec-15 PT at €12. ! Better products and higher utilization to drive profitability. FCA’s profitability will be driven by the globalization of the Jeep brand involving the production and sale of Jeep vehicles across Europe, LatAm and Asia. Additionally, we expect production of Jeep as well as the expanded product portfolio of Alfa Romeo and Maserati in Italy is expected to boost capacity utilization in the region, thus helping the EMEA division return to profit. FCA’s profitability should be aided by its plan to establish a footprint in China by focusing on local China production of Jeep and Fiat brands. ! Lower CapEx Post-2016 should bring down net debt. We believe FCA’s CapEx spending will peak in FY16e, with PP&E CapEx increasing to 8% of revenues by FY16e from 5.8% in FY14e. We expect this to subsequently reduce to 5% of revenues by FY18e resulting in avg. FCF generation of >€3bn per year in FY17 & FY18. We estimate this would turn FCA from net debt of >€10bn in FY14e to net debt of €4.2bn in FY18e.
European Autos Jose M Asumendi
AC
(44-20) 7742-5315 [email protected] Bloomberg JPMA ASUMENDI
Nikhil Bhat, CFA (44-20) 7134-9934 [email protected] J.P. Morgan Securities plc
For Specialist Sales advice please contact: Timm Schulze-Melander, CFA (44 20) 7134-1331 [email protected]
Price Performance 12 11 10 €
9 8
! Street not expecting FCA to meet FY16 targets. Bloomberg consensus estimates indicate that the market believes FCA might achieve its FY16 revenue target but fall short of the EBIT and margin targets. Consensus expectations for FY16 EBIT margin are at 4.6% vs. FCA’s FY16 target range of 4.9%-5.7%, indicating material upside to street expectations if FCA demonstrates improved profitability.
7 6 Jan-14
Abs
Apr-14
YTD 5.1%
Jul-14
1m 12.1%
Oct-14
Jan-15
3m 18.3%
12m 49.3%
! Neutral rating with PT of €12. We value FCA at €12 per share (Dec15, from €8) using a '15 SOTP. We value Ferrari in correlation to the J.P. Morgan luxury universe, an asset whose value we expect FCA to unlock during FY15. We look forward to tracking the work FCA has set itself to deliver across regions. Evidence of this should support positive share price momentum in FY15, in our view. Fiat Chrysler Automobiles NV (FCHA.MI;FCA IM) FYE Dec 2013A 2014E
2014E
2015E
2015E
(Prev)
(Curr)
(Prev)
(Curr)
0.74 0.74 86,816 2,972 3.4% 1,008
0.16 0.16 91,813 2,731 3.0% 787
0.41 0.41 96,603 3,250 3.4% 1,336
0.73 0.73 95,579 3,379 3.5% 1,496
1.06 1.06 101,614 4,021 4.0% 2,167
904 7.0 0.3
201 44.3 0.3
501 24.5 0.3
897 9.9 0.3
1,308 9.4 0.3
Adj.EPS FY (€) EPS FY (€) Revenue FY (€ mn) EBIT FY (€ mn) EBIT Margin FY Pre Tax Income FY (€ mn) Net Income FY (€ mn) P/E (x) FY EV/Sales FY
Company Data Price (€) Date Of Price Price Target (€) Price Target End Date 52-week Range (€) Market Cap (bn) Shares O/S (mn)
10.18 14 Jan 15 12.00 31-Dec-15 11.27-6.57 13.07 1,285
Source: Company data, Bloomberg, J.P. Morgan estimates.
See page 14 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com
Jose M Asumendi (44-20) 7742-5315 [email protected]
Europe Equity Research 15 January 2015
Mid-term plan clearly set across regions FCA has laid out a clear mid-term plan targeting margin re rating and improvement across regions which should lead the group to deleverage the balance sheet aggressively from FY16 onwards. We strongly believe FY15 will be a year in which FCA executes across regions as follows: a)
North America: we expect FCA to focus on improving the recent Consumer Reports ranking thanks to the recent change in the Global Head of Quality. A clear step will be taken by revamping the current Minivan product offering where we forecast 12 weeks of production shutdown in H1FY15 in order to bring the new product family at the latest by Q1FY16. In contrast we expect FCA to continue profiting from a strong North American car market which we expect to grow another 2% in FY15.
b) Europe: FCA will focus on utilizing better the industrial assets thanks to the gradual change in product mix from volume manufacturing into premium manufacturing as it executes the Alfa Romeo strategy (increasing volumes from 60K to 400K units by FY18). We also expect FCA to finally turn the corner in Europe as it introduces the Jeep brand (Renegade), contributing into stronger earnings momentum yoy. c)
Latam: We are not optimistic about the prospects of the Brazilian car market in FY15 but also believe FCA has a strong chance of outperforming the market thanks to the ramp-up of the Pernambuco Brazilian car plant. In addition, we estimate the firm has a 2% structural margin difference to peers, thanks to its industrial footprint, which we expect FCA to retain and build on going forward as demand returns to higher levels in Brazil.
d) Asia: We expect FCA will focus on working closely with its Chinese partner (GAC) to boost local production, accelerating the Jeep and Fiat brands aggressively in a growing market. Despite the substantial CapEx increase we forecast the firm will spend over the next two years, we expect the firm to maintain the net debt level under control and foresee the expected cash flow burn in FY15 being broadly offset by the dividend payment from Ferrari. Over the next quarters we are looking for evidence of FCA finally turning the corner in Europe, a progressive ramp-up of the new plant in Brazil, as well as North American profits normalizing in FY15 thanks to lower recall costs incurred yoy vs FY14.
2
Europe Equity Research 15 January 2015
Jose M Asumendi (44-20) 7742-5315 [email protected]
Street and JPM vs. FCA’s Mid-term Plan JPM vs. FCA’s mid-term plan. Our numbers are not strictly comparable to FCA’s mid-term plan since FY15 onwards our numbers exclude Ferrari, while the FCA targets include it. Our EBIT, EBIT margin and net income estimates for FY16 and FY18 remain at the low end of FCA’s target range set out in its mid-term plan. Table 1: JPM estimates vs. FCA Mid-term plan targets € in millions
Revenues EBIT EBIT Margin Net Income CapEx Net Ind. Debt *
JPMe 96,603 3,250 3.4% 501 7,692 10,304
FY14 FCA Target ~€93bn €3.6-4.0bn 3.9%-4.3% €0.6-0.8bn €7.5-8.5bn €9.8-10.3bn
JPMe 106,867 4,870 4.6% 1,981 10,745 10,099
FY16 FCA Target ~€104bn €5.1-5.9bn 4.9%-5.7% €1.9-2.5bn €10.5-11.5bn €9.8-10.3bn
JPMe 123,584 8,054 6.5% 4,621 8,657 4,226
FY18 FCA Target ~€132bn €8.7-9.8bn 6.6%-7.4% €4.7-5.5bn €8.5-9.5bn ~€0.5-1.0bn
Source: Company reports and J.P. Morgan estimates. * including the convertible bond, dividend inflow from Ferrari, shares issues, and deconsolidation of Ferrari
Consensus vs. FCA’s mid-term plan. Bloomberg consensus suggests that the street believes FCA can achieve its FY16 revenue target but will fall short of the stated EBIT and EBIT margin targets. This potentially leaves material upside to street estimates if FCA improves its margins and shows that it can achieve the stated FY16 targets. Table 2: Consensus vs. FCA Mid-term plan targets € in millions
Revenues EBIT EBIT Margin Net Income CapEx Net Ind. Debt *
Cons 98,167 3,321 3.4% 0.46
FY14 FCA Target ~€93bn €3.6-4.0bn 3.9%-4.3% €0.6-0.8bn €7.5-8.5bn €9.8-10.3bn
Cons 108,898 4,959 4.6% 1.88
FY16 FCA Target ~€104bn €5.1-5.9bn 4.9%-5.7% €1.9-2.5bn €10.5-11.5bn €9.8-10.3bn
Source: Company reports and Bloomberg consensus estimates.
JPM vs Consensus. We find it difficult to read consensus estimates from Bloomberg due to the inclusion/exclusion of Ferrari from FCA’s estimates. However, we believe our numbers are slightly below consensus expectations.
Table 3: JPM vs. Consensus Estimates € in millions, except per share
Revs EBIT % margin
FY14 JPMe 96,603 3,250 3.4%
FY15 JPMe 101,614 4,021 4.0%
FY16 JPMe 106,867 4,870 4.6%
FY14 - Cons 98,167 3,321 3.4%
FY15 - Cons 104,211 4,301 4.1%
FY16 - Cons 108,898 4,959 4.6%
FY14 - % diff -1.6% -2.1%
FY15 - % diff -2.5% -6.5%
FY16 - % diff -1.9% -1.8%
Source: J.P. Morgan estimates. Consensus from Bloomberg.
3
Neutral
Fiat Chrysler Automobiles NV
FCHA.MI, FCA IM Price: €10.62
Solid mid-term plan, now it is time to deliver
▲ Price Target: €12.00 Previous: €8.00
FCA has laid out a clear path which it needs to execute over the next few years in order to improve profitability across NA, EU and Latam. We await signs of industrial improvement triggering share price rerating. We remain Neutral and set our Dec-15 PT at €12. ! Better products and higher utilization to drive profitability. FCA’s profitability will be driven by the globalization of the Jeep brand involving the production and sale of Jeep vehicles across Europe, LatAm and Asia. Additionally, we expect production of Jeep as well as the expanded product portfolio of Alfa Romeo and Maserati in Italy is expected to boost capacity utilization in the region, thus helping the EMEA division return to profit. FCA’s profitability should be aided by its plan to establish a footprint in China by focusing on local China production of Jeep and Fiat brands. ! Lower CapEx Post-2016 should bring down net debt. We believe FCA’s CapEx spending will peak in FY16e, with PP&E CapEx increasing to 8% of revenues by FY16e from 5.8% in FY14e. We expect this to subsequently reduce to 5% of revenues by FY18e resulting in avg. FCF generation of >€3bn per year in FY17 & FY18. We estimate this would turn FCA from net debt of >€10bn in FY14e to net debt of €4.2bn in FY18e.
European Autos Jose M Asumendi
AC
(44-20) 7742-5315 [email protected] Bloomberg JPMA ASUMENDI
Nikhil Bhat, CFA (44-20) 7134-9934 [email protected] J.P. Morgan Securities plc
For Specialist Sales advice please contact: Timm Schulze-Melander, CFA (44 20) 7134-1331 [email protected]
Price Performance 12 11 10 €
9 8
! Street not expecting FCA to meet FY16 targets. Bloomberg consensus estimates indicate that the market believes FCA might achieve its FY16 revenue target but fall short of the EBIT and margin targets. Consensus expectations for FY16 EBIT margin are at 4.6% vs. FCA’s FY16 target range of 4.9%-5.7%, indicating material upside to street expectations if FCA demonstrates improved profitability.
7 6 Jan-14
Abs
Apr-14
YTD 5.1%
Jul-14
1m 12.1%
Oct-14
Jan-15
3m 18.3%
12m 49.3%
! Neutral rating with PT of €12. We value FCA at €12 per share (Dec15, from €8) using a '15 SOTP. We value Ferrari in correlation to the J.P. Morgan luxury universe, an asset whose value we expect FCA to unlock during FY15. We look forward to tracking the work FCA has set itself to deliver across regions. Evidence of this should support positive share price momentum in FY15, in our view. Fiat Chrysler Automobiles NV (FCHA.MI;FCA IM) FYE Dec 2013A 2014E
2014E
2015E
2015E
(Prev)
(Curr)
(Prev)
(Curr)
0.74 0.74 86,816 2,972 3.4% 1,008
0.16 0.16 91,813 2,731 3.0% 787
0.41 0.41 96,603 3,250 3.4% 1,336
0.73 0.73 95,579 3,379 3.5% 1,496
1.06 1.06 101,614 4,021 4.0% 2,167
904 7.0 0.3
201 44.3 0.3
501 24.5 0.3
897 9.9 0.3
1,308 9.4 0.3
Adj.EPS FY (€) EPS FY (€) Revenue FY (€ mn) EBIT FY (€ mn) EBIT Margin FY Pre Tax Income FY (€ mn) Net Income FY (€ mn) P/E (x) FY EV/Sales FY
Company Data Price (€) Date Of Price Price Target (€) Price Target End Date 52-week Range (€) Market Cap (bn) Shares O/S (mn)
10.18 14 Jan 15 12.00 31-Dec-15 11.27-6.57 13.07 1,285
Source: Company data, Bloomberg, J.P. Morgan estimates.
See page 14 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com
Jose M Asumendi (44-20) 7742-5315 [email protected]
Europe Equity Research 15 January 2015
Mid-term plan clearly set across regions FCA has laid out a clear mid-term plan targeting margin re rating and improvement across regions which should lead the group to deleverage the balance sheet aggressively from FY16 onwards. We strongly believe FY15 will be a year in which FCA executes across regions as follows: a)
North America: we expect FCA to focus on improving the recent Consumer Reports ranking thanks to the recent change in the Global Head of Quality. A clear step will be taken by revamping the current Minivan product offering where we forecast 12 weeks of production shutdown in H1FY15 in order to bring the new product family at the latest by Q1FY16. In contrast we expect FCA to continue profiting from a strong North American car market which we expect to grow another 2% in FY15.
b) Europe: FCA will focus on utilizing better the industrial assets thanks to the gradual change in product mix from volume manufacturing into premium manufacturing as it executes the Alfa Romeo strategy (increasing volumes from 60K to 400K units by FY18). We also expect FCA to finally turn the corner in Europe as it introduces the Jeep brand (Renegade), contributing into stronger earnings momentum yoy. c)
Latam: We are not optimistic about the prospects of the Brazilian car market in FY15 but also believe FCA has a strong chance of outperforming the market thanks to the ramp-up of the Pernambuco Brazilian car plant. In addition, we estimate the firm has a 2% structural margin difference to peers, thanks to its industrial footprint, which we expect FCA to retain and build on going forward as demand returns to higher levels in Brazil.
d) Asia: We expect FCA will focus on working closely with its Chinese partner (GAC) to boost local production, accelerating the Jeep and Fiat brands aggressively in a growing market. Despite the substantial CapEx increase we forecast the firm will spend over the next two years, we expect the firm to maintain the net debt level under control and foresee the expected cash flow burn in FY15 being broadly offset by the dividend payment from Ferrari. Over the next quarters we are looking for evidence of FCA finally turning the corner in Europe, a progressive ramp-up of the new plant in Brazil, as well as North American profits normalizing in FY15 thanks to lower recall costs incurred yoy vs FY14.
2
Europe Equity Research 15 January 2015
Jose M Asumendi (44-20) 7742-5315 [email protected]
Street and JPM vs. FCA’s Mid-term Plan JPM vs. FCA’s mid-term plan. Our numbers are not strictly comparable to FCA’s mid-term plan since FY15 onwards our numbers exclude Ferrari, while the FCA targets include it. Our EBIT, EBIT margin and net income estimates for FY16 and FY18 remain at the low end of FCA’s target range set out in its mid-term plan. Table 1: JPM estimates vs. FCA Mid-term plan targets € in millions
Revenues EBIT EBIT Margin Net Income CapEx Net Ind. Debt *
JPMe 96,603 3,250 3.4% 501 7,692 10,304
FY14 FCA Target ~€93bn €3.6-4.0bn 3.9%-4.3% €0.6-0.8bn €7.5-8.5bn €9.8-10.3bn
JPMe 106,867 4,870 4.6% 1,981 10,745 10,099
FY16 FCA Target ~€104bn €5.1-5.9bn 4.9%-5.7% €1.9-2.5bn €10.5-11.5bn €9.8-10.3bn
JPMe 123,584 8,054 6.5% 4,621 8,657 4,226
FY18 FCA Target ~€132bn €8.7-9.8bn 6.6%-7.4% €4.7-5.5bn €8.5-9.5bn ~€0.5-1.0bn
Source: Company reports and J.P. Morgan estimates. * including the convertible bond, dividend inflow from Ferrari, shares issues, and deconsolidation of Ferrari
Consensus vs. FCA’s mid-term plan. Bloomberg consensus suggests that the street believes FCA can achieve its FY16 revenue target but will fall short of the stated EBIT and EBIT margin targets. This potentially leaves material upside to street estimates if FCA improves its margins and shows that it can achieve the stated FY16 targets. Table 2: Consensus vs. FCA Mid-term plan targets € in millions
Revenues EBIT EBIT Margin Net Income CapEx Net Ind. Debt *
Cons 98,167 3,321 3.4% 0.46
FY14 FCA Target ~€93bn €3.6-4.0bn 3.9%-4.3% €0.6-0.8bn €7.5-8.5bn €9.8-10.3bn
Cons 108,898 4,959 4.6% 1.88
FY16 FCA Target ~€104bn €5.1-5.9bn 4.9%-5.7% €1.9-2.5bn €10.5-11.5bn €9.8-10.3bn
Source: Company reports and Bloomberg consensus estimates.
JPM vs Consensus. We find it difficult to read consensus estimates from Bloomberg due to the inclusion/exclusion of Ferrari from FCA’s estimates. However, we believe our numbers are slightly below consensus expectations.
Table 3: JPM vs. Consensus Estimates € in millions, except per share
Revs EBIT % margin
FY14 JPMe 96,603 3,250 3.4%
FY15 JPMe 101,614 4,021 4.0%
FY16 JPMe 106,867 4,870 4.6%
FY14 - Cons 98,167 3,321 3.4%
FY15 - Cons 104,211 4,301 4.1%
FY16 - Cons 108,898 4,959 4.6%
FY14 - % diff -1.6% -2.1%
FY15 - % diff -2.5% -6.5%
FY16 - % diff -1.9% -1.8%
Source: J.P. Morgan estimates. Consensus from Bloomberg.
3
