Volkswagen (1K) | Buy | Diversification could slim the balance sheet

Research evidence excerpt

Volkswagen (1K) | Buy | Diversification could slim the balance sheet

18,756 23,215

defence-related revenues and potential growth opportunities as military Net profit adj (m) 8,793 11,431 14,506

spending increases. Net financial debt (m) 228,441 229,936 232,503

FCF (m) -5,020 1,156 874

▪Furthermore, Volkswagen could potentially offer selected manufacturing sites to EPS adj. and ful. dil. 17.54 22.80 28.94

the defence industry, either through asset sales or contract manufacturing Consensus EPS 18.89 24.27 29.10

arrangements. The Osnabrück and Dresden plants have frequently been cited in Net dividend 5.26 6.84 8.68

press reports as potential candidates, with some reports suggesting they could FY to 31/12 12/26E 12/27E 12/28E

produce components for air-defence systems or armoured vehicles. In our view, P/E adj and ful. dil. 4.8 3.7 2.9

EV/EBITDA 1.3 1.2 1.0

this creates a significant opportunity for Volkswagen to diversify its automotive EV/EBIT 4.6 3.5 2.7

revenue base through business with ministries of defence or defence contractors. FCF yield -11.1% 2.6% 1.9%

More importantly, it could provide an avenue to reduce excess production Dividend yield 6.3% 8.1% 10.3%

capacity in Europe, optimise capital allocation, and streamline the balance sheet. ND(F+IFRS16)/EBITDA 4.5 4.1 3.8

We believe this potential to lower the group’s cost base and operating leverage Gearing 108.7% 104.6% 100.2%

ROIC 2.5% 3.0% 3.5%

would have a greater impact on future financial performance than the direct EV/IC 0.2 0.1 0.1

revenue opportunity from defence-related vehicle sales, as it could help reduce Sector Most Pref. Sector Least Pref.

the volatility of margins and FCF generation over time. Aumovio Aston Martin

Deconstructing the forecasts Continental BMW Ferrari ElringKlinger