Q3 23: Strong Auto margin step up confirmed for Q4

The key takeaway from Continental’s Q3 23 was the confirmation of the FY23 Automotive margin guidance (2.0-2.5%) on the back of the retroactive compensation for cost inflation and R&D reimbursements. This is clearly reassuring since it calls for a huge step-up in the division’s profitability to a >5% Adjusted EBIT margin (vs. 1.0% in 9M 23). We expect limited changes to the consensus and our estimates, and see the upcoming CMD as a positive catalyst.

Q2 23: Expected guidance adjustments lead to a focus on the Automotive margin

Since Continental’s Q2 23 results had already been pre-released, the focus was on the FY23 guidance update. The group mainly confirmed what the market was already pricing following peers’ publications: a weakening tyre market triggering a cut to the revenue target and a raised auto production expectation supporting the Automotive division guidance. The latter looks supportive for the Conti’ equity story, which overwhelmingly relies on the growth of auto supplier activity.

Continental’s lagging cash collection did not overshadow its improving Automotive performance

Continental posted Q1 23 results that beat consensus on the adj. EBIT across all the divisions with Tyres’ margins remaining strong and Automotive profitability at last returning to the the black. This is likely to offset the negative surprise at the FCF level dragged down by higher than-expected capex, high inventories and still-high receivable. Overall, as with its peers, the management confirmed its FY23 guidance and market outlook, calling for minor changes to our and consensus’ forecasts an

Continental continues to surprise...positively

With FY22 figures already known, all eyes were on the FY23 outlook and FY22 dividend proposal. Neither disappointed! The dividend proposal came in 8% above expectations, highlighting the confidence for FY23 after a weak FY22. The newly-released guidance was more optimistic than consensus with profitability in line in relative terms, therefore calling for upgrades to FY23 EPS. With Conti’s Automotive unit seen as a tracker of the group’s long-awaited progress, we especially welcome the consensus-

Automotive feeling better?

Continental posted robust Q3 22 results overall with consensus-beating adjusted EBIT margins on both Automotive and Tires. A c.€500m goodwill impairment was booked as a result of rising interest rates. FCF came in fully in line with expectation and the FY22 guidance was confirmed. Going forward we would like to flag the good performance of the Automotive unit. This together with the c. €6bn order intake in Q3 22 (already announced) might foreshadow the beginning of the long-awaited ramp-up of Co

Continental sticks to its unloved structure

The FY21 results came in strong, at the upper end of the guidance and close to consensus, which has not been the case for a while now. EPS was ahead of expectations due to a one-time positive effect from discontinued activities. As a result, the dividend came in ahead of expectations at €2.20. Looking into FY22, the newly-issued guidance appears far from being realistic, as it excludes any impact from the Russia-Ukraine war. Splitting the group is not planned.

Vitesco: feedback from the CMD

Conti’s powertrain division, to be spun-off in H2 21, held a CMD to announce its mid-term strategy. The next five years will be a transition phase to exit from non-core non-profitable activities and focus on growing the Electrified Technologies segment to reach breakeven by 2024. The 2025 horizon outlook looks reachable, but the visibility remains low on the timeline of the transition in the years to come.

Careful FY21 outlook but mid-term guidance confirmed

Conti released a FY20 operational performance which was in line with its guidance (organic sales down 12.7% yoy and adjusted EBIT margin of 3.5%), while restructuring charges weighed on the bottom line. The company’s guidance for 2021 looks cautious and uncorrelated to mid-term targets, as more time and further restructuring and R&D expenses are required to reach its cruising speed towards 2025 horizon objectives.

New FY20 guidance and new CEO: Conti soon back on the road?

Continental reported its Q3 20 figures with surprising results coming from the Rubber and Powertrain divisions. Most of the group’s recovery comes from the Rubber division due to its significant exposure to the replacement tyre market. In the Powertrain division, a huge spike in EV sales helped with its recovery, while its profitability, although low, benefited from a weak comparison base. It is now up to Nikolai SETZER (the new CEO) to drive Conti towards FY20 outlook’s positive FCF.

Farewell, for now, to advanced autonomous tech

Continental posted a mixed set of H1 20 results with shrinking revenue (-25.9% yoy) dragged down by the non-rubber business (-28.3% yoy). This revenue contraction translated into a -€448.8m profitability hit (margin of -2.7% vs. 4.8% in H1 19). As such, FCF was affected (-75.7% yoy) though benefiting from favorable working capital and lower capex (-35% yoy). Despite the lack of an official outlook, the company expects an improvement in the automotive market for Q3 20.

Production ramp-up is the name of the game

Q1 20 numbers were heavily impacted by production slowdowns, mainly in China. Production seems to be a persistent issue that will affect the Q2 results as COVID-19 fully reflects its impact in Europe and North America. Despite the above expectations, results in Q1, the adjusted EBIT experienced a huge contraction, falling by 47% yoy, and paving the way to a tough FY20.

2019 numbers were horrible, except for the dividend

Management had to release five profit warnings since spring 2018. In spite of that, the final 2019 accounts showed a much higher than expected net loss of €1.23bn. We had expected a net loss of €175m, while the consensus (based on Continental’s own survey) was at €-493m. However, the dividend was only cut from €4.75 paid for 2018 to €4.00, whereas we had expected €3.75.

Unchanged car production expected for 2020 and no material recovery thereafter

Management has turned rather cautious for the next five years and does not expect a material recovery after an expected 6% fall for the current year. For 2020, it expects the production of passenger cars and vans to be unchanged, at best.

Management realises that takeovers prior to 2008 were too expensive

Continental acquired VDO for more than €11bn in 2007. At that time, VDO generated annual turnover of probably €8bn, but these activities have generated rather small profit margins ever since and Powertrain suffered the occasional loss. Management has now pulled the plug and has written €2.5bn off.

2030 strategic plan released

The Management and Supervisory Boards have discussed Continental’s 2030 strategy and the structural transformation programme for the years 2019-29. All of this will lead to one or more plant closures (primarily in Germany and the USA) and to a good 5,000 lay-offs (2% of the worldwide workforce).

Surface Transforms - New guidance – forecasts under review

Surface Transforms has issued new revenue guidance for FY24, with the company now expecting revenues in the range £17.5-22m. We are withdrawing our previous forecasts for FY24 and withdrawing our price target while we review the impact of the new guidance.

Surface Transforms plc (SCE LN) - Forecasts and valuation withdrawn

We note the regulatory announcement this morning from Surface Transforms and withdraw our estimates and valuation, pending conversations with management.

Morning Note – 16 April 2024

Robust margin and cash performance

Surface Transforms (SCE LN) - Obstacles removed for higher production

Surface has issued a brief Q1 update. Production will ramp-up this year as final new equipment is installed, and manufacturing teething problems recede.

Initial Equity Trading Comments - 19 February 2024

Hybridan Small Cap Feast - 16/04/2024

16th April 2024 * A corporate client of Hybridan LLP ** Arranged by type of listing and date of announcement *** Alphabetically arranged **** Potential means Intention to Float (ITF) has been announced Dish of the day Admissions: Delistings: What’s baking in the oven? ** Potential**** Initial Public Offerings: Reverse Takeovers: Electric Guitar (ELEG.L) Concurrent with its Admission to trading on AIM, Electric Guitar is proposing to acquire the entire issued share capital of 3radical Limited for

Dowlais Group - Motoring forward

Dowlais Group’s first set of results were ahead of our expectations, with positive cash generation a highlight despite restructuring and demerger costs. Softer automotive markets will limit margin progress in FY24 towards the double-digit target. Despite this, margins of c 6.5% are still ahead of automotive peers, although the shares trade at a significant discount to our implied generic peer-based valuation.

Morning Note – 9 April 2024

Zeus Top Picks for 2024 - 2023 review and outlook for 2024

On 9 January last year, we set out our ten top stock picks for 2023, for what turned out to be another relatively poor twelve months for UK equities due to two wars, stubbornly high inflation and further tightening of monetary policy. This was even as other major markets, such as the US, largely recovered in the year. In the 2023 calendar year, the AIM All-Share index fell 8.2% and is still 42% off its 2021 high. From the release of our 2023 top picks note, the average total return (assuming div

Morning Note – 4 April 2024

LIBERUM: New Energy Nuggets: Hydrogen - the future is green

Hybridan Small Cap Feast - 17 April 24

17th April 2024 * A corporate client of Hybridan LLP ** Arranged by type of listing and date of announcement *** Alphabetically arranged **** Potential means Intention to Float (ITF) has been announced Dish of the day Admissions: Delistings: What’s baking in the oven? ** Potential**** Initial Public Offerings: Reverse Takeovers: 16 April 2024: Electric Guitar (ELEG.L) Concurrent with its Admission to trading on AIM, Electric Guitar is proposing to acquire the entire issued share capital of 3radi

Gooch & Housego (GHH LN) - A chink of light

Gooch has issued a positive update for H1. Trading has started to recover with stocking levels normalising at industrial and medical devices customers. The outlook is positive with growth returning, and management has confirmed our full year estimates (adjusted for the disposal of EM4). The order book and order flow appear healthy, and net debt is comfortable. Gooch clearly still has plenty to do to lift operating margins from a lacklustre 8.1%, but the transformation plan appears to be back on

Nexteq - FY23 adj EBITDA +4% ahead, FY24E upgrades of +1-10%

Nexteq’s FY23 results show adjusted EBITDA +4% ahead of the +6% upgrade at the January trading update, record FY23 EFCF of $17.4m, and a confident outlook that leads us to reiterate our FY24E revenue and upgrade FY24E gross profit, adj EBITDA, and EFCF by +1-10%. The strategic focus on higher-margin products and customers reducing elevated inventory levels led FY23 group revenue -5% yoy to $114.3m, with Quixant 6% lower at $69.3m and Densitron 2% lower at $45.1m. Effective supply-chain managemen