Releasing the brakes

Renault steps up a gear but shares stuck in first

Despite heavy hits from its stricken Russian operations, Renault's comeback drive is ahead of schedule. The French carmaker increased its operating profit by 44 per cent in 2015 and met its medium-term group margin target of five per cent two years early. And Chief Executive Carlos Ghosn still has gas in the tank: the new Megane sedan and other lucrative models will hit showrooms in 2016, the recovery in European vehicle demand is set to continue, and the re-opening of Iran, a long-time Renault stronghold, creates new growth opportunities.

Yet the group's stock market value does not adequately reflect the opportunities. Strip out the company's holdings in Japan's Nissan and Germany's Daimler, and its own business looks undervalued by as much as a third. The French group's overall market cap stands at euro 20 billion. Its 43 per cent stake in Nissan is worth euro 14 billion, and the three per cent holding of Daimler adds another euro 2 billion.

As Renault's own industrial business sits on net cash of euro 2.7 billion, the implied enterprise value of its automotive division stands at below one time the unit's 2016 operating profit, a Reuters Breakingviews estimate based on Eikon data shows. French rival Peugeot is valued at 2.3 times 2016 EBIT while Daimler and BMW trade at multiples above three.

Renault certainly deserves some kind of discount on its German rivals: it lacks a footprint in the margin-rich premium segment, has a large exposure to ailing Russia, Brazil and other emerging markets, and the wayward French government is its biggest shareholder. But Ghosn has repeatedly proven that Renault can nonetheless be successful and forecasts further improvements for 2016.

If Renault's own automotive division was able to fetch a valuation similar to Peugeot's, its implied market cap would rise by euro 2 billion to around euro 6 billion, a Breakingviews calculation shows. As Renault steps up a gear, there is little reason for its shares to be stuck in first.