Breakingviews - Volkswagen valuation merits shift to higher gear

The new electric Volkswagen model ID. 4 is shown during a media presentation in Zwickau, Germany, September 18, 2020.

LONDON (Reuters Breakingviews) - Volkswagen has finally put its foot on the gas. Shares in the 110 billion euro automaker rose nearly 5% on Tuesday after it outlined plans to double electric vehicle deliveries this year to boost pandemic-damaged profitability. Were boss Herbert Diess to focus attention on VW’s valuation, they could shift yet higher.

VW is up a third this year, outperforming a 16% rise in Europe’s STOXX 600 Automobiles benchmark. That’s largely down to a swift pandemic rebound in China, VW’s biggest single market, and a transformational electric strategy which saw sales of battery cars and hybrids roughly triple year-on-year to 422,000 vehicles in 2020. Diess now wants to accelerate that to 1 million units this year while rolling out new software sales across VW’s fast-expanding electrified fleet. One way of turbocharging that might be listing part of its sports-car brand Porsche. Another more lucrative way could be to eventually spin off its battery car unit altogether.

UBS reckons Diess can flog 2.57 million electric cars by 2025 – below its 3 million targets. Assuming an average price of 39,000 euros, the base price for VW’s cheaper ID.3 electric model and a 5% operating margin – broadly the same as what UBS reckons a combustion engine Golf currently contributes – implies it can generate over 5 billion euros in operating profit. Put that on a 20 times multiple analysts see as reasonable to reflect fast growth without reaching Tesla’s inflated 115 times heights, and the division might be worth 100 billion euros.

Throw in a software unit potentially worth 186 billion euros, according to a Breakingviews calculation, and Diess may have two businesses worth more than double the carmaker’s current equity value. That excludes legacy combustion engines which will still account for the majority of VW’s sales in the foreseeable future.

True, actually hiving off divisions into separate entities may be fanciful given the Porsche-Piech family clan and heavy trade union influence has tended to stymie similar offloads of undervalued marques like Lamborghini. But there’s nothing to stop Diess floating the idea to get investors to focus on his valuation potential – even if he doesn’t do it.


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