Ron.s

DAIMLER-MORGAN STANLEY-Includes discussion of trucks.
Net profit Forecast: 2020 $3.00; 2021 $10; 2022 10.94; 2023 $11.59

July 2, 2021 03:00 AM GMT
Daimler | Europe
In a topping process?
MORGAN STANLEY & CO. INTERNATIONAL PLC+
Stock Rating
Overweight
Industry View
In-Line
Price Target
€80.00
Harald C Hendrikse
EQUITY ANALYST
Harald.Hendrikse@morganstanley.com
Victoria A Greer
EQUITY ANALYST
Victoria.Greer@morganstanley.com
Daimler ( DAIGn.DE, DAI GR )
Autos & Shared Mobility / Germany
Stock Rating
Industry View
Price target
Shr price, close (Jun 30, 2021) 52-Week Range
Mkt cap, curr (mn)
Net debt (12/21e) (mn)*
EV, curr (mn)*
* = GAAP or approximated based on GAAP
+44 20 7425-6240
+44 20 7425-7944
Overweight In-Line €80.00 €75.30 €80.41-35.02 €80,556 €3,277 €88,704
We think Daimler has had another good quarter, despite semi- conductor challenges. However, with EBIT margins topping, with PMIs topping, and with stimulus topping, are the shares topping also? Remains Overweight.
Daimler should post another strong Q2 2021, maybe less strong than Q1 2021:
Daimler pre-reported on Q1 2021 earnings in March 2021. Q2 2021 performance has likely sustained strong profitability on the volume recovery and sustained strong price-mix (but not incrementally better – discounts cannot get below zero). However, adjusting for exceptional gains in Q1 2021 (200bps), some negative impact from raw materials (incl. semi-conductors) and fixed costs (logistics, marketing) as well as some late Q2 volume impacts on production from semi-conductor shortages all suggest Mercedes Cars EBIT margins closer to 10% than the 14% reported for Q1 2021. We continue to believe Q1 2021 margins will prove to be peak. We think Daimler will reiterate its FY21 Cars EBIT margin range of 10%-12% (reported). In Trucks, we expect some incremental progress as volumes have risen, and we see EBIT margins rising slightly above the 7% high end of the range in a seasonally strong quarter – and expect the 6%-7% EBIT margin range guidance to be re-iterated also. Mercedes Mobility Q2 2021 earnings are expected to stay exceptionally strong as in Q1 2021, as credit costs trough (boosting net interest margins); as credit loss provisions from FY20 reduce FY21 credit costs, and as residual values remain exceptionally strong. Reflecting our Q2 2021 forecasts, our Daimler EPS rises a further 2-3% for FY21E and FY22E to €10.05 and €9.65.
Mercedes earnings should normalise into 2H 2021 and beyond, down in FY22E:
Daimler management has done an excellent job on Mercedes' earnings and execution in the past 18 months. However, in Q1 2021, adjusting for the China JV and small exceptional gains, as well as the change in depreciation rates, the Mercedes Cars and Vans EBIT margin would have been below 10% to make it comparable with BMW or Mercedes prior to COVID. Q2 2021 EBIT margins at Mercedes Cars should normalise already. Further, in its Q1 2021 bridge, Daimler reported a €2.3bn EBIT gain from "volume/price/mix" on a €3.7bn revenue growth number. This suggests a marginal margin of 62% – we suspect almost half of this number has come from "price/mix" – assuming a normal volume effect of 30%- 35% – which should normalise once current production and inventory issues are cleared (likely 2022). Once this happens, the Mercedes EBIT margin would fall back below 10% without other drivers. In fact, assuming Mercedes' guidance to be correct suggests reported EBIT margins nearer 10% already for the remainder of 2021, after the record earnings in 1H 2021. Last, given the obvious tailwinds in 2021, and removal of those tailwinds plus potential headwinds in FY22E, including raw materials, we think it is quite possible that Mercedes EBIT margins in FY22E will be lower than FY21E. Clearly, that is not currently the consensus assumption.
How much upside to the Daimler Truck (DT) spin-out? The Daimler Truck spin- off remains the key bullish theme for Daimler. Applying Traton and Volvo valuation multiples suggest DT can be valued between €25bn and €40bn. Given that EBIT margins and execution remain at the lower end of the peer range, similar to Traton or Volvo prior to the current management team, we would value DT at €28-32bn, or €25-€30 per Daimler share. Clearly, there is more potential upside to DT, if performance is improved sufficiently. However, DT EBIT margin targets suggest to us that we are unlikely to see such improvement for some time, if at all. As an illustration, if we then value Mercedes Passenger Cars at the current valuation of BMW – very similar on almost all metrics, including Autos revenues, Financial Services assets and equity, and net Industrial cash – of €55bn-€60bn (€50-€55 per Daimler share), this gets us to a mid-point Daimler Group valuation of €80 – in line with our PT for Daimler. Whilst we continue to prefer some of the management actions of Daimler over its German peers, we see no reason to take a different valuation approach between BMW and Daimler.
Daimler Truck CMD targets too low? – higher margins, at 8%-9% but not until 2025: At the Daimler Truck (DT) CMD, DT management gave a candid assessment of where the business was, highlighting a strong global footprint and market position, but also a lack of leverage on its global scale, a lack of consistency (too high break-even) and a lack of profitability in Europe, Asia, and Brazil. Once again, new plans were laid out to improve its performance – to 8%- 9% EBIT margins by 2025 under "fair weather" conditions (6-7% in rainy conditions, >10% in sunny ones). DT showed that their Truck peer benchmark is a 10%-11% return on sales but actually set their base case targets 300bps below that benchmark, and even that target has been set only for 2025. We think investors would look for DT to have been more ambitious. Looking at our forecasts, achievement of the middle of that range would add approx €500m-€600m to our DT / Daimler EBIT forecasts – or €0.40 to our Daimler Group EPS. We suspect the bulls had priced this in already.
Conclusion: Daimler is in the process of topping? Still our relative German pick as Overweight: As we highlight above, Daimler's earnings momentum has continued strongly into FY21E, and EPS consensus continues to rise. Investor positioning continues to favour cyclicals over defensives, and Daimler's absolute valuation remains low relative to the market (if not low relative to 5-year Daimler multiples). Investors believe sustained record earnings performance suggests the shares may stay higher for a little longer, although much of this is now extrapolated into FY22E-FY24E consensus. Further, "stronger for longer" may be true for fundamentals, but it rarely works for Automotive OEM share prices. In fact, we believe that current topping in Daimler EBIT margins; topping in global PMIs; topping in China economic momentum (and China car sales growth); and potential topping in global stimulus are raising downside risks for auto OEM valuations from any economic sentiment changes. Expectations, reflected in share prices, are very high. Although we see all three German OEMs as similarly highly valued, Daimler remains our key German Autos OEM Overweight on a relative basis, PT remains €80 – we reduced BMW to Underweight in April.