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Electric dreams

8 July 2021 By Christopher Thompson

Volvo Cars are known for understated confidence. Now the Chinese-owned Swedish carmaker is bragging about its green goals ahead of a stock market listing in Stockholm. Hiving off its combustion engine unit will encourage investors to focus on future demand for electric vehicles. But ongoing sales of gas guzzlers put a brake on its hopes for a Tesla-like valuation.

Owner Zhejiang Geely Holding scrapped an initial public offering of the Gothenburg-based company in 2018, when investors balked at the mooted $30 billion valuation. Recent market mania for electric rides offers Geely founder Li Shufu another shot. Volvo says it wants battery-powered cars to account for half of its sales by 2025 and plans to phase out combustion cars by the end of the decade.

Listing Volvo as a traditional carmaker would leave Li well short of his target. Assume the company’s net income rebounds to $1.2 billion next year, roughly the same as it earned in 2019. On a similar multiple of 2022 earnings as BMW, Volvo would be worth $8 billion.

A corporate rejig could change the calculation, though. The company on Thursday said it is steering its division which makes combustion engines into a joint venture with its Chinese parent. Though Volvo will still make and sell petrol-fuelled cars until 2030, removing the unit that builds them from its balance sheet limits its exposure to the shrinking business.

That could give its valuation a jolt. Listed electric car makers Tesla, Nio, Li Auto and Xpeng currently trade on an average enterprise value of nearly 6 times expected revenue for 2023, according to Breakingviews calculations based on Refinitiv data. If Volvo’s top line grows at the same 13% annual rate that the company projects for car sales in the coming years, revenue will hit $45 billion by 2023. Assume a fifth of that comes from electric vehicles, and value those sales at the same multiple as Tesla and its rivals, and Volvo could in theory be worth around $50 billion.

Such a transformation depends on investors ignoring Volvo’s continuing sales of combustion engine cars, as well as the company’s ongoing share of any future losses in the diminishing engines unit. Li’s hopes for a Tesla-like multiple are therefore probably fanciful. But if the reshuffle lets Volvo raise capital at a more electrified valuation, he will hardly mind.

 

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