HANNOVER (dpa-AFX) – The car supplier and tire manufacturer Continental is still in a state of upheaval. The Hanover-based company is struggling with major problems in the automotive supply sector, and speculation is rife about a radically different setup for the traditional company. At the Capital Markets Day on Monday (December 4th), CEO Nikolai Setzer must now state what the company should do next. Parts of the direction are already known, but given the price development in recent years, investors and analysts would like to see a greater release.
THIS IS WHAT CONTI DOES:
At the previous capital market day in December 2020, Setzer issued medium-term return targets and growth prospects for the divisions at the time. The automotive supply division, however, fell short of the targets. The target margin for business with, among other things, electronics, brakes, interior equipment and technology related to autonomous driving should be six to eight percent in the medium term. Management defines the medium term as a period of three to five years.
The corona pandemic, the subsequent chip and parts shortage as well as the energy price crisis as a result of Russia’s war against Ukraine have had a significant impact on results in recent years; Conti made operational losses in automotive supply between 2020 and 2022.
Although the major stress factors are more or less a thing of the past, things are looking poor so far this year. In the first nine months, the automotive division recorded an operating margin before special items of just one percent, while two to three percent are calculated for the year as a whole.
The new division boss, Philipp von Hirschheydt, has already given the red pencil. A mid-four-digit number of administrative jobs are expected to disappear; reports speak of around 5,500 positions. This should reduce annual costs by 400 million euros as early as 2025. The automotive supply sector recently had almost 103,000 employees. Von Hirschheydt also wants to take a closer look at investments. Analysts have long been accusing the group of investing too much.
Now the question is how Conti fills the ambitions in the largest division with life and when the Hanoverians want to end up in the target area. The lucrative tire sector sometimes had to help finance the necessary investments in the automotive business. Investors dislike something like this because the tire division would be able to achieve more on its own and there is a lack of real cost synergies between the business areas.
The “Manager Magazin” recently reported that the chairman of the supervisory board Wolfgang Reitzle Therefore, bear with thoughts of division. As a result, the future Conti could consist primarily of the tire business and the plastics technology division Contitech and noticeably reduce its dependency on automotive suppliers. CEO Setzer should be able to accept this request more and more, it was said.
A first morsel of “less car, more rubber” can already be seen at Contitech: The area with customers in the automotive industry is on the checklist for strategic options – i.e. sales, partnerships or spin-off. From now on, Contitech will focus primarily on other industrial customers. The area produces, among other things, hoses and cables, but also supplies the mining industry with conveyor belts.
Officially, the company has been saying for some time that management looks at the portfolio a lot with regard to the question of what it can do best and what might be better off in a different structure. Setzer should now be more specific here. In any case, Conti is working on its factory network due to the move away from the combustion engine and advances in electronics. The Gifhorn site, for example, will gradually stop production by the end of 2027.
In December 2020, Setzer gave the automotive business an organic growth rate of an average of seven to eleven percent as a medium-term goal. Above all, software and technology related to autonomous driving should provide a boost. In 2019, Conti made sales of 18.9 billion euros with the automotive supply division, and in 2020 only 15.3 billion because of the Covid downturn. So far this year, revenues of 20 to 21 billion euros are targeted.
In 2020, Setzer had forecast medium-term growth of an average of five to eight percent and an operating profit margin of eight to eleven percent for the entire group.
WHAT ANALYS SAY:
According to Romain Gourvil from Berenberg Bank, the conditions for a significant improvement in business in the automotive supply sector are in place. After years of disappointing development in the division, he is becoming increasingly confident about the upward trend in margins. Restructuring and more efficient investments as well as falling investment intensity should help compensate for inflationary pressure and lower global vehicle production.
According to the industry expert, the tailwind of price increases in the tire business is running out. However, the important tire replacement business should have reached customers at the end of a painful phase of inventory reduction.
JPMorgan expert Jose Asumendi wrote after the latest quarterly figures that the biggest lever for the margin in automotive supply would be a reduction in the investment rate. He expects a two-stage recovery in profitability: Initially, the margin is likely to increase slightly in the next two years, but will remain below four percent. More thrust can be expected from 2027.
The experts surveyed by the Bloomberg news agency expect the Conti Group to grow sales in the next three years from almost EUR 41.9 billion this year to EUR 47.4 billion in 2026. That would be an average increase of 4.2 percent annually . The operating result should increase from 2.5 billion euros this year to almost 4 billion euros in 2026; the operating margin would therefore be around 8.4 percent in the future.
THIS IS HOW THE STOCK RUNS:
With a price of around 70 euros, Conti is now miles away from its record high of 257 euros in January 2018. At that time, the drive division still belonged to the group, which today operates under the name Vitesco (Vitesco Technologies) and is itself listed on the stock exchange. Even if investors mentally add the price of Vitesco, for which the automotive supplier Schaeffler is offering over 94 euros in its takeover offer, they only come to just under 89 euros. For every five Conti shares, shareholders received one Vitesco paper for the spin-off in September 2021.
Conti’s market value has now shrunk to a good 14 billion euros. At its peak at the beginning of 2018, including Vitesco, it was over 50 billion. In 2023, however, the price will be up by a good quarter. This puts the group in tenth place in the leading index DAX (DAX 40). However, the paper was already worth around 112 euros around November 2021 after the Vitesco spin-off.
The largest shareholder is the Schaeffler family of industrialists, which has held around 46 percent of the shares since an unsuccessful takeover attempt in 2008 and thus effectively has the say at general meetings./men/tav/mis
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