Conti rated as ‘buy’ for ‘best cost base’ in the tyre business

Following comparably strong second-quarter 2020 results, some financial analysts have confirmed their “buy” rating for Continental AG shares. The reason? Ongoing cost-cutting plans as well as “deep restructuring measures”. Writing in an investor’s note published on 7 August, Jefferies equity research suggested Conti’s planned spin-off of its Vitesco powertrain operation plays a key role in this strategy:

“Conti’s Automotive Group is going through deep restructuring measures. This will re-align the product portfolio and make the business more competitive in the mid-term. The current COVID-19 crisis will accelerate the program.”

Speaking at an Industrial Conference on 6 August, Continental AG CFO, Wolfgang Schaefer reportedly highlighted that short-term cost cuts are progressing “slightly ahead of expectations” at -5 per cent of full-year 2020 fixed costs (excluding demortisation and amortisation) compared with 5 per cent of quarters two and four of 2019. In addition, capital expenditure cuts are said to have increased to -25 per cent up from -20 per cent.

While the restructuring programme addresses a number of different fronts, the pre-announced Vitesco spin-off is particularly strategic: “With a potential spin-off of Powertrain in FY21, Conti has the opportunity to clean up the portfolio and make the RemainCo powertrain-agnostic. The transaction should be accretive to valuation multiples, too.“

That said, lower than expected volumes, pricing pressure and capacity growth is reportedly affecting profitability in Continental’s tyre business. However, this will only last as long as demand lags: “a recovery of volumes will drive margins back towards 15 per cent as Conti still has the best cost base in the Tire market, in our view”, the Jefferies analysts concluded.