(News Bulletin 247) – The research department went on Thursday to buy the automotive supplier, judging in particular that the outperformance of its sales compared to the evolution of automotive production could accelerate.

After a difficult year in 2022 when inflation eroded their margins, automotive suppliers are experiencing a 2023 vintage in the form of a stock market rebound. Valeo is fully in line with the trend, with an increase of more than 23% since the start of the year. But, for Stifel, the group still has some under the hood.

The research department revised its buying opinion on Thursday on the tricolor automotive supplier, against “keep” previously, while raising its price target to 26.5 euros against 21 euros previously. This still gives a potential of almost 30% to the action.

On the Paris Stock Exchange, the Valeo title advanced by 2.4% to 20.62 euros around 12:45 p.m. in reaction to this change in recommendation.

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An order book that keeps its promises

Valeo will publish its half-year results on July 27. But the group has already indicated during a presentation organized in June by Exane BNP Paribas that it expects an operating margin of around 3.2% over the first six months of 2023 against 1.2% over the same period of 2022. Cash generation should be “limited”, because 200 million euros of cost inflation repercussions for June will be recognized in July-August, with therefore a lag.

But it is above all for the future that Stifel is confident. The design office estimates that on all indicators, Valeo’s performance will be better in the second half of the current financial year.

The outperformance of the group’s growth compared to the evolution of automotive production, a key indicator of the sector, should accelerate. “The reason is that the order book ends up keeping its promises in the areas of ADAS (driving assistance systems, Editor’s note) of powertrains, but also of the “lighting” division (where the weak growth possibly bottomed out in the second half of 2022),” the bank explained.

In addition, in terms of inflation, Valeo should be helped by its cost reduction measures, of 100 million euros by the end of the year as well as by the delay in passing on cost increases of raw materials, which admittedly penalizes the first half but will suddenly boost the generation of cash in the second.

Towards a better perspective

As for VSeA, a former joint venture specializing in automotive electrification technologies with Siemens and in which Valeo took 100% of the capital last year, its losses are reducing “much faster than we initially thought”, estimates Stifel who thinks that this activity will be profitable in 2025.

The bank also does not rule out that Valeo raises its outlook for the current year, with a range of forecast margins that could be tightened upwards. For now, the operating margin is expected between 3.2% and 4% this year, but Stifel retains a rate of 4%. The bank is also counting on a cash generation of 450 million euros for 2023, much more than the target given by the group (more than 320 million euros).

In view of these prospects, “nothing prevents us from being more constructive”, underlines Stifel.