VW debt paints fairer picture than battered shares

Reuters | Updated: Jul 25, 2019, 14:34 IST

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)By Liam ProudLONDON, July 25 (Reuters Breakingviews) - Volkswagen’s debt and equity investors are sending mixed signals to Herbert Diess, chief executive of the 80 billion euro German carmaker. Shareholders, perhaps panicked by ride-sharing or self-driving cars, are implying that the company won’t exist soon, whereas creditors are cruising along happily. The disparity suggests investor pessimism towards the auto sector is overdone.VW, which reported a 30% year-on-year jump in second-quarter operating profit on Thursday, is just an extreme example of the heebie-jeebies pervading carmaker valuations. There’s plenty to be worried about: Ride-hailing apps like Uber or tech groups like Alphabet unit Google could roll out a fleet of self-driving, electric robotaxis, annihilating the market for personal cars.Start with VW’s value. Its enterprise value, including pension liabilities and minority investments and stripping out cash, is about 87 billion euros, using July 24 prices and Evercore ISI estimates. But a big chunk of that comprises its financing arm, which lends to customers to buy its cars. Assume the financial services unit is worth book value, and the core business of making vehicles has an implied enterprise value of about 58 billion euros.That sounds like a lot, but not when set alongside the 13 billion euros of free cash flow that Diess’ business will throw off this year alone, using Evercore forecasts, which exclude profit from the financial services arm. Assume a drastic 10% annual decline through to 2025, and the free cash flow over the next six years alone should be worth 55 billion euros in today’s money, when discounted at 10%. That suggests the business after 2025 is worth less than 3 billion euros.Perhaps. But why then are creditors not panicking too? VW has a 1 billion euro bond maturing in January 2030 which yields around 1.4%. True, that’s a roughly 60 basis point premium to other triple-B rated debt, according to Bank of America Merrill Lynch indexes. But it’s a long way from pricing in financial destruction. Compare that to electric-car rival Tesla, whose 2030 debt yields around 8.1%.VW’s bond prices are possibly skewed by the European Central Bank’s loose monetary policy. But the debt paints a fairer picture than the company’s battered stock. Diess has poured billions of euros into dedicated electric-car designs and technological know-how, giving him a good position as the industry goes green. He has also allied with U.S. peer Ford Motor on autonomous driving. It’s hardly a company on the brink of extinction.On Twitter https://twitter.com/liamwardproudCONTEXT NEWS- Volkswagen on July 25 reported a 30% rise in second-quarter operating profit, as rising demand for sports utility vehicles and premium brands boosted margins.- The Wolfsburg, Germany-based company’s operating profit rose to 5.1 billion euros in the second quarter, up from 3.9 billion euros a year earlier.- For previous columns by the author, Reuters customers can click on- SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe(Editing by Neil Unmack and Karen Kwok)

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