Has Volvo’s Strong Value Creation Been Overlooked by the Market? – ValueWalk Premium

Has Volvo’s Strong Value Creation Been Overlooked by the Market?

Value play with strong dividend growth potential

The post was originally published here.

Highlights:

  • Acquisition in China to ride demand wave
  • Consistent value addition through strong profitability
  • Leading role in EV and hydrogen to reclaim market share

Download the full report as a PDF

Price on the way to turn bullish, volume signal unclear

  • In 2H21, the 50 DMA has mainly stayed below the 200 DMA
  • However, most recently, the 50 DMA started to rise, and it seems like it can cross the 200DMA very soon
    • If the 50 DMA-line were to continue to rise, we would consider it a bullish signal
  • The RSI-Volume recently converged to the 50%-line which, if continues, would also be a positive sign

Q1 2022 hedge fund letters, conferences and more

Volvo’s revenue breakdown 9M21

Acquisition in China to ride demand wave

  • China is by far the strongest and fastest-growing market for heavy duty trucks in the world
    • It is the primary market for the company to realize future growth opportunities
  • Instead of exporting to China, Volvo aims to ramp up sales by establishing a production site in the country

New production site adds 7% capacity

  • Volvo confirmed its plan to acquire JMC Heavy Duty Vehicle which owns a manufacturing site in Taiyuan, China
    • The acquisition accumulates to SEK1.1bn
  • With the acquisition, Volvo aims to ramp up its sales in China
    • It adds 15,000 trucks to Volvo’s capacity
    • As a comparison, in 2020, Volvo delivered 4,500 trucks to China

Consistent value addition through strong profitability

  • Volvo’s impressive ROIC is attributable to its specialization in high-margin trucks and construction equipment
    • Volvo sold its passenger vehicles unit in 1999 as the synergies between commercial and passenger vehicles were low
    • Since 2021, Volvo Car is a separate listed entity under majority control of Geely
  • Volvo’s biggest competitor Daimler followed a similar strategy by spinning-off its truck segment in January 2022

What happens to a company’s ROIC over time?

Leading role in EV and hydrogen to reclaim market share

  • Over the past 5 years, Volvo has lost market share in its most important regions
  • Still, its early shift toward pure EV vehicles could help to regain its market share over the long run
    • The company is also betting on hydrogen which could be more suitable for trucks due to its long-distance ability
    • Strategic partnerships with Daimler (largest truck manufacturer) could lead to a more concentrated industry

FVMR Scorecard – Volvo

  • A stock’s attractiveness relative to stocks in that country or region
  • Attractiveness is based on four elements
    • Fundamentals, Valuation, Momentum, and Risk (FVMR)
  • Scale from 1 (Best) to 10 (Worst)

Consensus remains cautious but sees upside

  • 17 analysts expect the company to outperform while 9 analysts still stay cautious
  • Analysts expect strong revenue growth in the next two years, but might be too pessimistic in 23E
    • Given that the global truck segment is expected to grow by 7-8% until 25E, I believe that Volvo can maintain a growth rate above 5%

Get financial statements and assumptions in the full report


P&L – Volvo

  • Net profit sees a strong rebound in 21E and could exceed its pre-pandemic level in 22E
    • The strong bottom-line is mainly driven by the margin expansion, but also strong growth prospects

Balance sheet – Volvo

  • Net assets have fallen in 2020 after selling UD truck segment to Isuzu Motors
    • However, increased CAPEX for capacity expansion and battery development lead to increase in net fixed assets again
  • The company is moderately leveraged
    • In 2020, its net-debt to equity ratio stood at 0.9x

Cash flow statement – Volvo

  • Strong operating cash flow allows the company to resume its dividend payments in line with its pre-pandemic policy
    • I expect dividend yield over the near-term to range between 2.5-3.5%

Ratios – Volvo

  • After the revenue rebound in 22E, we assume revenue growth to normalize
    • Beyond 2022, I see a healthy annual revenue growth potential around 5%
  • EBIT margin expansion in 21E likely to stay
    • This helps Volvo to be among the most profitable trucks manufacturer

Long-term share price performance potential

Free cash flow – Volvo

  • Strong cash flow generation is crucial for returning dividends to shareholders

Value estimate – Volvo

  • I see a slightly higher revenue growth than consensus
    • Tapping further into the Chinese market could constitute a catalyst for the share price
    • Truck market has favorable growth prospects

World Class Benchmarking Scorecard – Volvo

  • Identifies a company’s competitive position relative to global peers
  • Combined, composite rank of profitability and growth, called “Profitable Growth”
  • Scale from 1 (Best) to 10 (Worst)

Key risk is intensified competition in local markets

  • Adverse regulatory environment in China could hamper business
  • Underestimating smaller local competitors could make expansion difficult
  • Failure to keep up with technological shift to long-distance EV vehicles

Conclusions

  • Riding demand wave in China is biggest potential for growth
  • Fast adaption to EV and hydrogen give it a timing advantage in the market
  • Industry-leading ROIC, but still trading at a discount

Download the full report as a PDF

Article by Andrew Stotz, Become a Better Investor.


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