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Up a gear

10 December 2014 By Olaf Storbeck

Volkswagen can improve its strained relationship with investors in 2015. Europe’s largest carmaker is on course to cut costs and boost sales. If Chairman Ferdinand Piech throws in higher payouts too, the valuation gap with glitzier German rivals should narrow.

In recent years, shareholders’ trust has been eroded by the expensive takeovers of truckmakers MAN and Scania, slipping profit margins at the core VW brand, and U.S. setbacks.

The ride could get less bumpy. Better than expected third-quarter profit could presage a broader rebound in 2015. The high-margin Audi and Porsche marques are thriving, while Volkswagen’s dominance in China is the envy of the industry.

Moreover, Chief Executive Martin Winterkorn insists he’s done with big M&A and is now prioritising profit. Plans to cut annual costs by up to 10 billion euros should start to bear fruit. There will be quick wins like pruning an unwieldy range of 300 models, while desirable new cars such as the revamped Passat sedan should lift sales.

The roll-out of an ambitious production technique, “MQB”, to increase standardisation across the group’s small and medium-sized cars, will enter its final phase. Long-promised efficiency gains should follow. The weaker euro and slowly improving car demand in Europe should also help.

And investors could see more cash. Volkswagen has promised to lift payouts to 30 percent of net profit over the medium term, but actual dividends are still a third lower. With 16.8 billion euros in net cash, it can afford to be more generous quite soon.

All this should narrow Volkswagen’s discount to Daimler and BMW. For years the company’s stock has been accorded a substantially lower rating. As of early December, Volkswagen’s preference shares, which are more widely held than voting stock, traded around 184 euros. That equates to 7.8 times expected earnings, roughly a fifth cheaper than its two peers.

A certain gap will remain justified by suboptimal governance, which gives too much power to the Piech family, trade unions and regional politicians. But financially and strategically, the group is now stronger than at any point in the past decade. It might be time for Volkswagen shares to move up a gear.

 This view is a Breakingviews prediction for 2015. Click here to see more predictions.

 

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