: Renault has new cash for a strategy that could make it an undervalued EV play, says UBS

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Renault sold its stake in rival auto giant Daimler on Friday, injecting cash into the company’s strategy for a multiyear turnaround focused on increasing profitability and pivoting toward the next generation of cars.

The strategy, known as the “Renaulution”, involves leveraging the French company’s electric-vehicle leadership in Europe, where the Renault Zoe is the region’s bestselling EV model.

Europe is key for Renault RNO, -0.08% and rivals like Volkswagen VOW, -0.17% and Tesla TSLA, -2.52%, because it is the second-largest market for electric-vehicles after China, which is home to competitive domestic manufacturers including Nio NIO, -3.13%, XPeng XPEV, -2.34%, and BYD 1211, -2.55%.

Renault announced on Friday that it had successfully sold its entire ownership stake in Mercedes-Benz-owner Daimler DAI, -2.62%, reaping €1.14 billion ($ 1.4 billion) from nearly 16.5 million shares sold at €69.50 per share. The sale represents 1.54% of Daimler’s share capital sold at a near 4% discount, based on the stock price at the close on Thursday.

Renault said that the proceeds of the sale would allow the group “to accelerate the financial deleveraging of its automotive activity,” which is in line with the company’s turnaround efforts outlined earlier this year. 

Plus: Forget Nio and XPeng. This company and Tesla will be the top two electric-vehicle plays by 2025, says UBS.

Renault and Daimler have a relationship dating back to 2010, when the former chief executives at both companies linked the groups in a move to share technology and manufacturing capacity. The industrial partnership, which included Renault’s strategic ally Nissan 7201, -0.87%, also involved the French and German auto giants taking mutual equity stakes. The industrial partnership between Renault and Daimler remains unchanged and wouldn’t be impacted by the share sale, the French group said.

Selling its stake in Daimler represents part of the first phase in Renault’s new strategic plan, announced in January following a larger-than-expected €8 billion loss in 2020. By 2023, the group aims to boost margins and recover cash generation, setting the stage for enriched car lineups and a pivot to new technology and energy, including electric-vehicles, in the years to follow.

According to UBS UBS, +0.42%, the market isn’t adding any value to Renault’s share price from a successful EV strategy, even though analysts at the Swiss bank estimate that the segment could represent more than 20% of the group’s earnings in 2025.

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UBS upgraded Renault from neutral to buy on March 2 and increased the 12-month target price on the stock from €22 to €54. Based on the share price on Friday, this means the stock has legs to climb nearly 37% higher, according to UBS.

Renault’s upgrade by UBS was driven by two factors, the Swiss bank said. The first was that the bank’s analysts believe the company will reach its 2023 financial targets outlined in the strategic plan—3% group operating margin— this year.

The second is that there is a “strong valuation rerating potential on the back of Renault’s compelling electrification strategy,” UBS analysts said in a report on March 2.

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Renault, as part of a strategic alliance with Nissan and Mitsubishi, was the second-largest seller of electric-vehicles in the key European market in 2020, according to automotive analyst Matthias Schmidt. With a nearly 19% share of the market, the alliance was behind only Volkswagen Group—and beat out Tesla.

Should the stock market come to appreciate Renault’s EV strategy, UBS said, this could trigger a rerating of the stock from between double the current rating to six times the current rating, depending on the valuation metric used. 

The company has “all the tools to sell competitive EV products in a cost efficient manner,” the analysts said, with its design platform on par with market-leader Volkswagen’s. In addition, UBS said that a key differentiator for Renault compared with other manufacturers is that the company is past its research and development peak, with a fully-dedicated EV platform already built.