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CC Research – Valeo

Opinion

We have increased our Price Target on Valeo from €87 to €100.80. We are overweight on Valeo for

the following reasons:

Macro reasons

• In 2013 15.5mln cars were sold worldwide. This represents a 7.5% increase on 2012. We are

expecting the number of units to further increase in 2014, moving close to the 16 million units

worldwide. This will increase demand for auto parts.

• We believe that growing Asian auto demand, which accounts for 52% of the global total, will

continue to support auto part manufacturers.

• China will continue to sustain a high demand for Valeo products. However we expect to see

growth at a decreasing rate, in line with the slowdown in China’s growth. (Our concern remains

the BRICs except China where we are seeing a weakness in demand particularly due to forex.

We do not expect to see a reversal in the short run.)

• Consumer Price Index for auto parts in Europe has continued to increase and we believe that

with an improvement in global growth including an improvement in growth in Europe, this

index will continue to increase and contribute positively towards margins.

Stance

Overweight

Country

France

Industry Class

Auto Parts

Company

Valeo

Bloomberg

FR FP

Date

19th

February 2014

Company Update Price €87.62

Price Target €100.80

52-week Range €38.58-89.99

Dividend Yield 1.5%

P/E 17.95x

Market Cap €6.75bln

Investment Thesis before FY13 Results

Results

Calamatta Cuschieri Markets Research

Events

FY13 results out on

20/02/2014

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CC Research – Valeo

Micro reasons

• Margin momentum should be more visible from 2014 onwards with the start of production of

new contracts booked between 2009 and 2012. We expect margins to increase gradually from

16.8% in 13E to 16.9% in 14E to 17.0% in 15E. The following catalysts will help improve margins:

o Valeo’s focus on CO2 emissions reductions solutions, arguably the number one mid-

term issue for the auto industry. Auto manufacturers are faced with targets imposed by

EU regulation to bring down CO2 emissions between 2015 and 2025. This regulation will

improve demand for sales for Valeo’s products.

o More value-added products with better pricing, delivering better margins.

o The very visible business shift towards Asia. Management are forecasting that by 2020,

the percentage of total sales towards North America, Western Europe and Japan will

decrease compared to the % sales to the rest of the world (Asia) which will continue to

increase.

o The group's cost containment strategy underway since 2010. We are forecasting

operating expenses are expected to represent the same % of sales going forward.

• Global vehicle sales by unit and by revenue continue to increase year-on-year. We are of the

opinion that this positive momentum will continue to increase sales for auto parts. We expect

sales for Valeo to grow by 2.9% in 13E, 4.5% in 14E and 5.0% in 15E.

Furthermore:

o Back log in orders - Valeo’s CO2 emissions solutions and intuitive driving order intake

increased by more than 70% and 130% respectively vs. 2009. Valeo’s order intake

reached an all-time high of €15.1bn at end-2012 and the group has pledged to maintain

it within the €14.0-15.0bn range going forward.

Conclusion

We are overweight on Valeo due to its positioning in the market. With automakers pressured to

bring down CO2 emissions, the demand for Valeo’s products is visibly increasing and this is shown in

the order backlog. The margin improvement between 2013 and 2016 should come from Valeo’s

improvement mix and its ongoing cost containment program. The main risk to our valuation would

be a significant decline in auto sales in emerging markets.

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CC Research – Valeo

Valuation

Following this update we adjust our 1yr price target to €100.8 based on the assumption of sales

growth of 2.9% in 2013, 4.5% in 2014 and 5% in 2015. The price target is calculated using an

Earnings Based Model with a forward PE of 18x and an Equity Risk Premium of 12.40%.

Source: Company’s financial statements, Calamatta Cuschieri calculations

Historical Price Target

Reference Date Price Price

Target

Analyst Recommendation

FR FP 25th

Nov 13 €77.86 €87.69 Team Coverage Overweight

FR FP 19th

Feb 14 €87.31 €100.80 Team Coverage Overweight

FY 2015E FY 2014E FY 2013E FY 2012 FY 2011

Revenue 13,274 12,642 12,099 11,759 10,868

Cost of Revenue 11,018 10,506 10,065 9,811 9,025

Gross Profit 2,257 2,136 2,034 1,948 1,843

Operating Expenses 1,447 1,378 1,319 1,276 1,139

Operating Income (EBIT) 810 758 715 672 704

Interest charges 135.9 132.5 119.7 117.0 90.0

Foreign Exchange Losses 7.0 8.0 10.0 7.0 5.0

Net Non-Operating Losses 0.0 0.0 0.0 -5.0 9.0

Pretax Income 667 618 585 553 600

Income tax expense 173 161 152 146 148

Income Before XO Items 493 457 434 407 452

Extraordinary losses 2.00 2.00 2.00 2.00 1.00

Minority Interests 25.9 28.8 28.4 25.0 24.0

Net Income available to shareholders 466 426 403 380 427

Basic Weighted Avg Shares 77.0 77.0 77.0 75.5 75.1

Basic EPS 6.05 5.54 5.24 5.03 5.68

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CC Research – Valeo

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Floor, Valletta Buildings, South Street, Valletta

VLT1103, Malta and bearing company registration number C13729. CC is licensed to conduct Investment Services in Malta by the

Malta Financial Services Authority. This information is being provided solely for information purposes and should not be deemed or

construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax, legal or any

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