Retail sales up 29% y-o-y in country; while stock is trading at lower end of its range, rerating is unlikely; ‘Neutral’ maintained.
JLR’s February 2019 US retail volumes showed healthy momentum reporting strong 29% y-o-y growth, ahead of our estimate of 18% y-o-y. This was across both Jaguar (up 59% y-o-y) and Land Rover (LR; 19% y-o-y).Model-wise, in LR, only RR and Velar reported
7-8% y-o-y decline while remaining models posted strong growth. In Jaguar, all models (except the XJ) reported strong growth on a favourable base.
Among luxury peers, growth trajectory has remained slow over past few months. BMW was flat y-o-y, while Audi/Mercedes declined 12% y-o-y. The overall industry reported 3% y-o-y decline. Incentives increased sharply m-o-m for JLR (Jaguar 26%, LR 11%). Incentives were down 1-3% for
Mercedes/Audi and Porsche but up 10% m-o-m for BMW.
We are factoring in a 12% decline in global wholesales for JLR in Feb-19 due to weak demand in China and the EU. We currently factor in a 10% decline in overall JLR volumes in FY19F (YTD -11%, implied Feb-Mar 19F down 8% or 61k pm). Ramp-up for I-Pace, launch of new Evoque can help volumes in FY20F.
The stock is trading at 4.2x/3.6x FY20F/21F EV/Ebitda, at the lower end of its trading band. However, we do not expect a re-rating given tough market conditions in China, risks to demand from a no-deal Brexit, weak premium demand in other markets and negative FCF for JLR until FY21F. Maintain Neutral.
We value TTMT on a SOTP methodology to arrive at our TP of `187. We value JLR at `66/share, based on 1.5x FY21F normalised Ebitda. We deduct the value of the unfunded pension liability of £248 mn to arrive at JLR’s valuation. We attribute `80/share value to standalone business, based on 8x FY21F Ebitda. We value other investments at `42/share.
Hard Brexit: If the UK has to leave the EU without any trade deal, this could lead to tariffs coming into place and affect JLR significantly in the near term.
Global growth slowdown: Weaker-than-expected economic growth in developed economies could present downside risks to earnings estimates.
Adverse currency movements: JLR is a net exporter in USD and net importer in EUR; thus, USD appreciation and EUR depreciation vs GBP are positive for JLR’s profitability. Any adverse currency movements could impact margin estimates.