DAI:GR
Daimler AG
St Andrews Investment Society 14/11/2016
Daimler AG
DAI:GR Set a record breaking year in 2015 and looks set to match it amongst a turbulent macro environment. Huge growth opportunities in green car Price (14/11/2016) technologies and trucking in developing countries. Market Cap (bn) EV (bn)
Company Overview Headquartered in Stuttgart, Germany, Daimler is a global car, truck and bus manufacturer which also features a financial services division. Additionally Daimler possesses numerous subsidiaries such as FUSO, AMG, Smart, Freightliner trucks as well as its main business, Mercedes-Benz. Daimler is an industry leader in luxury vehicles and are currently forging the way in green technology for implementation in its vehicles. Daimler has a global presence and is the second largest luxury car provider, behind BMW, occupying 17.1% of the market.
€65.30 €69.84 €160.8
CONSUMER LUXURIES Price Target Investment Horizon
€72.00 12m
12m performance: 100 80 60 40 20 0
Investment Rationale Our investment rationale is founded upon 4 key points. Daimler has invested heavily in R&D and in more environmentally friendly cars, also making their classic saloons more technologically advanced. We see this provides an area for growth worldwide, especially in China. The government has just passed a new directive making banks lower downpayments on eco-friendly cars. Daimler are looking to further penetrate the Chinese market with its electric cars so this provides a key area for growth. In Q3 of 2016, revenues derived from China was up 23% from the same period last year, which indicates that although there is economic uncertainty, Daimler have continued to perform well. They have also set up DENZA, an exclusively electric car company for the Chinese market to take advantage of the financial leniency towards eco-friendly cars. Daimler also plans to invest a further EUR 14 billion in plants and equipment on top of the EUR 5 billion it spent last year, showing their optimistic outlook.
Market Data: 52- Week Range Shares Out. (bn) EV/EBITDA EV/OpFCF P/E Div./Yield
50.8-85.5 1.07 8.5x 40.6x 8.43x €3.25/4.98%
Financial Data: Revenue (bn) Revenue growth EBITDA (bn) EBITDA growth EBITDA margin
149.5 12.55% 18.9 11.54% 24%
Leverage: Net Debt (bn) Net Debt/EBITDA EBITDA/Interest
82.5 Secondly, they have expanded the brand, not only for cars, but also for its 4.3x trucking business. Daimler have just set up BharatBenz which is an Indian 31.44x subsidiary making their trucks. BharatBenz supplies the rapidly expanding Indian market with over 20 different types of trucks. In just 4 years, BharatBenz has claimed 5% of the Indian market and this appears to be growing. In Q2 of 2016 they experienced double digit growth on Q2 2015 and eroded some of TATA’s market share. It also adds to their FUSO trucking business in Japan and Daimler Trucking North America operations. Daimler has a car sharing business called Car2go. It features Smart and Mercedes vehicles with point to point rentals. It is an alternative to traditional rental and has an app as well for easier use. As of October 2016, it has 2 million members making it the largest car-sharing company in the world.
Page 1 of 5
DAI:GR
Daimler AG
Thirdly, we believe Mercedes-Benz has a superior market position. In the first half of 2016, Mercedes-Benz beat BMW in car sales alone (not including buses or trucks). BMW sold 986,557 units whereas Mercedes sold over a million with 12% growth from the first half of 2015. They are also significantly ahead of Audi at this stage, who are lagging with parent company Volkswagen, as a result of current company troubles. This means they delivered on their target of beating BMW sales, 4 years early, indicating how well positioned this company is. Daimler is also very well diversified, with not only manufacturing cars, but also trucks and buses as mentioned above. It also has a financial services arm which contributes about 12% to total EBIT. There are indications that Daimler is undervalued as it currently trades with an EV/EBITDA of 8.5, which is below the industry average of around 10.03. We also believe the market has overreacted to the Chinese slowdown at the start of year. The share price fell following press releases regarding China’s economic problems, but Daimler have shown consistent growth in this region. The Chinese auto market is outperforming the economy. We believe that it has not been priced into Daimler’s current valuation. With Donald Trump now as US president and his intention to shift car production back to the USA, this will likely hurt Ford and GM, as the majority of their plants are based in Mexico. This means their unit prices will go up. Daimler has more worldwide facilities so they could potentially exploit the US market further as a result.
Market Position Daimler has revenue deriving from Mercedes-Benz cars, trucks, buses and financial services. This provides a rather diversified income stream, ranging from their premium cars (accounting for 60% of their EBIT) to their trucks, vans and buses (making up 28% of EBIT). Financial services contributes 12% of EBIT showing resilience to changing market trends and possible recession. Daimler’s income is also geographically diverse, with China accounting for only 10% (despite uncertainty in the Chinese economy, in 2015, Daimler’s sales still increased by 30%, up from 27% growth the year earlier) of their revenue and strong initiatives in other developing nations (such as BharatBenz trucks in India) will only further this cause. Mercedes-Benz is also currently winning the sales race against BMW in terms of growth, showing their ability to outperform their competition. Daimler’s R&D capabilities are also incredibly strong with an autonomous truck expected to be launched in 2025, which is the first autonomous truck licensed in the USA, and mass development in safer and more fuel efficient vehicles should also aid to keep Daimler at the forefront of vehicle development. They are also market leaders when it comes to the new trend of car sharing. They have the largest car sharing service in the world, car2go, which has over 2 million members and has just expanded into China. Daimler have also introduced mytaxi as competition to Uber. This shows Daimler is not only a leading car company, but is also branching out into modern car technology through the utilisation of their vehicles. BMW’s revenue originates purely from cars, and revenues are therefore not as diversified. BMW is also far more exposed to China, with 21% of their business conducted there. In the first half of 2016, Daimler beat BMW in cars sales alone and are also closing in on BMW in China, as a growing middle class are showing a shift in preference to Mercedes
Page 2 of 5
DAI:GR
Daimler AG
Financial Position Daimler’s financial position supports our investment rational with a revenue CAGR of 12.55% from 2013-2015. The strong growth, especially in 2015 was due to enhanced performance in the cars and trucks department with Mercedes-Benz sales growing 14% and trucks growing 16%. NAFTA growth was an impressive 26%, due to higher unit sales as well as positive exchange rate effects and efficiency improvements. China growth was 10%, indicating a robust company structure, staying relatively unscathed from the current economic volatility. The reason for 2014 being a slower year for growth then 2013 was down to three things. Firstly, cost of sales went up as revenue also went up. Secondly, there was increased levels of spending on research by approximately 8% and finally Daimler experienced a reduction in profits being obtained on equity method investments. In terms of financial ratios, Daimler looks to be in a very positive position. It is below the industry average EV/EBITDA, which we believe suggests that it is undervalued by the market as a result of over caution regarding China. Daimler’s strong growth in this geographical region should show in due course. In Q3 this year, revenues were up 23% on the same time last year showing this strong performance. Daimler
BMW
Fiat Chrysler
Ford
Industry Average
EV/EBITDA
8.5
9.54
2.71
10.38
10.03
P/S
0.47
0.57
0.1
0.32
0.49
D/E (%)
208
206
147
435
108
Quick Ratio
0.86
0.72
0.86
0.72
0.5
RoE (%)
15.55
15.89
10.16
24.3
12.4
As we can see, Daimler is above the industry average return on equity and also has healthier quick ratio than its competitors showing it has more liquidity, an indication that it is financially healthier. Daimler is carrying a reasonable amount of debt, similar to BMW, yet lower than Ford, but we do not see this as an issue as Daimler has many avenues of growth and we do not anticipate them struggling to repay any short term liabilities given their more favourable quick ratio. We believe the just below average P/S ratio also shows Daimler is undervalued by the market, considering its strong sales growth in Q3 this year. The balance sheet also looks robust. One concern however is the reduction in operating free cash flow, but this can be attributed to increased investment in research as well as trucking factories.
Page 3 of 5
DAI:GR
Daimler AG
Daimler - Financial Summary 13A-15A CAGR
FY2013A
FY2014A
FY2015A
LTM
117,982
129,872
149,467
152,658
12.55%
3%
10%
15%
EBITDA
15,183
15,751
18,570
17,850
10.59%
Margin
18%%
3.7%
17.9%
10,815
10,752
13,186
12,344
10.42%
Margin
23%
-1%
23%
OpFCF
4,842
5,479
3,960
1,725
-9.57%
Margin
233%
13%
-28%
8,720
7,290
8,711
8,452
-0.05%
28%
-16%
19%
(€m, FYE Dec) Revenue Growth
EBIT
Net income Margin
Growth Prospects & Risks Daimler is well positioned in Asia, particularly in China, and expects revenue growth in this region due to a growing middle class and an increasing demand for its products. However, Daimler’s exposure to China in particular could be a risk considering the country’s unstable economy, but as mentioned earlier, Daimler has lower exposure than BMW and Audi, showing their resilience should China witness a dramatic downturn. On the other hand, Daimler’s HGV section may not be affected as significantly as its premium products in the event of a global recession. Daimler is also expanding their brand powerfully with BharatBenz taking market share in the Indian trucking sector from TATA. Another key subsidiary is car2go which is now the largest car sharing service with over 2 million members with most of those in North America and it has just launched in China. This is useful for those who cannot afford, or do not frequently require cars, as demand for this service appears to be buoyant. Daimler have also acquired mytaxi, which is in direct competition for Uber. One in five German taxi drivers have signed up for it and they have set up in the USA, with Washington DC the first trialled city. Daimler has a strong Research and Development department and is currently investing heavily in green technology, particularly in low-emission and fuel-efficient engines. This could win the company favour with governments and companies around the world and offset the impact of tougher environmental regulations in many countries. In addition, China’s new banking regulation which lowers down-payments on eco cars, combined with Daimler’s new eco-car brand DENZA catering for the Chinese market, provides an exciting avenue for growth. Daimler is also investing in the development of autonomous trucks, which are currently undergoing their first tests – these could generate significant revenue but they currently have an unknown mass-market timescale and face stiff competition. Another potential risk that Daimler faces is that it has high exposure to Germany and the rest of Europe, which may be affected by the events of Brexit. Significant pound depreciation may reduce sales in the UK, and the European Union is currently experiencing slow overall growth. The key risk is Daimler’s emissions investigation which commenced in April. They were asked to investigate their certification process when producing their vehicles. However, we do not see this as a huge risk, partly because it has been priced in by the market already. Daimler are also investing EUR 14bn on research, plants, property and Page 4 of 5
DAI:GR
Daimler AG
equipment, up from the EUR 5bn they spent last year. This shows they are bullish in the face of the investigation and do not believe it is a significant issue.
Management Structure & Integrity Dr. Dieter Zetsche, chairman of the Board of Management along with 7 other members making up the full board of Daimler AG and Head of Mercedes-Benz Cars. He joined the research department of the then Daimler-Benz AG in 1976, has been a member of the Board of Management of Daimler AG since December 16, 1998 and Chairman of the Board of Management of Daimler AG since January 1, 2006. Zetsche just appeared in front of the German Green Party saying he shares their vision of zero emission cars in the future. Daimler is a founding participant of the UN Global Compact, which has the goal of promoting more equitable forms of globalization in terms of society, ecology and economy. A key aspect of Daimler’s sustainable management approach involves offering safe, fuel-efficient, and low-emission vehicles, as this is the only way to ensure they remain a clear leader in the area of sustainability as one of the world’s foremost automakers. For instance, Daimler AG is involved in a joint project with Archer Daniels Midland Company and Bayer CropScience to develop the semievergreen shrub jatropha curcas as a biofuel. Furthermore, in 2016, Daimler subsidiary ACCUMOTIVE announced their stationary batteries, to store up to 20 kWh of solar power for later use, with Daimler also planning to invest €1.5 billion in battery technology. Daimler is in the top ranking in the CDLI. It achieved a top ranking once again in the CDP (formerly Carbon Disclosure Project) in 2015. The company was honoured for outstanding commitment and exemplary transparency in dealing with climate change and scored the maximum number of 100 points in the Climate Disclosure Leadership Index (CDLI). In addition, Daimler received an “A-” performance rating for its initiated measures, already achieved progress, and planned strategies for reduction of CO2 emissions, putting it in the top 10 percent of all companies assessed.
Shareholder Structure Institutional investors own the highest percentage of Daimler Stock, with most of them located in Germany and the USA.
Page 5 of 5
