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VW's emergence as top 'Tesla fighter' drives shares to highest since emissions scandal

The carmaker has returned to being Germany’s most valuable public company

Volkswagen Group -
The new ID.3 electric hatchback

Volkswagen (XETRA:VOW) shares have surged this month as it rose from the ashes of its diesel emissions scandal to stand as perhaps the top electric vehicle contender against Tesla Inc (NASDAQ:TSLA).

Even before this week’s first 'power day', focusing on battery production plans, interest in the company as the leading “Tesla fighter” among the old guard of automotive heavyweights had been sparked by newly positive research from investment banks and brokers.

Conducting a proprietary ‘teardown’ of Volkswagen’s first all-electric vehicle, the ID.3, analysts at UBS found the car measures appears to be fully cost competitive with Tesla and offer best-in-class energy density and efficiency.

READ: Where will all Volkswagen's lithium and nickel come from?

While VW’s launch of the car was beset by production hiccups, software glitches and pandemic disruptions, UBS said the ID.3 is “the most credible EV effort by any legacy auto company so far”.

“VW might not be the Apple, but the Samsung of the EV world,” said UBS analyst Patrick Hummel.

Just like Samsung has an edge over Apple with its superior smartphone display, there is one area where VW may be ahead of Tesla. VW has placed a big bet on next-generation lithium ion batteries.

The ID.3 hatchback and its ID.4 SUV version will be mainly sold in Europe, with VW also using the same underlying vehicle platform for new models for its others brands, including Audi, Skoda and Seat, this year.

VW’s modular platform is also being licensed by Ford Motor Company (NYSE:F) to launch a new electric Ford Fiesta in Europe for launch in 2023, while there has also been speculation that Apple could become a future partner.

This week, in a major drive to make EV viable for the wider market, VW said it will work alongside various partners to build six gigafactories in Europe by the end of the decade, slash the complexity and cost of electric battery cells, and roll out and operate around 18,000 public fast-charging points around Europe by 2025.

The carmaker said it is seeking to gradually reduce battery costs in the entry-level segment by up to 50% and in the volume segment by up to 30%.

READ: 'Holy grail' battery breakthrough for VW partner QuantumScape to have ripple effect

“We want to have a total of six cell factories up and running in Europe by 2030, thus guaranteeing security of supply,” said Thomas Schmall, head of Volkswagen Group components at the 'power day' online presentation.

With the company pledging to increase electric vehicles sales 27 fold by 2025, the aim of upping its battery gigafactory game is to be able to produce 240 gigawatt hours of batteries a year in Europe over the next decade, enough to provide power units for 4mln cars.

Analysts estimated around €15bn will need to be invested by the company over the next five years, assuming a 50% stake in the gigafactories.

“On average, we will drive down the cost of battery systems to significantly below 100 euros per kilowatt hour. This will finally make e-mobility affordable and the dominant drive technology.”

He said VW is looking at integrating battery production all the way through to industrial recycling alongside selected strategic partners, with supplier collaboration intensified so that up to 95% of raw materials can be recycled.

Some analysts said this means that Volkswagen is exploring potential supply chain investments or acquisitions.

The shares, which last year were hit by initial failures in the ID.3 launch, missed group emission targets and speculation about CEO Herbert Diess potentially leaving, have jumped by a third or almost doubled since the start of March, depending on share class.

This is their highest level since the summer of 2015, when Dr Diess joined after being poached from BMW, and returned VW to being Germany’s most valuable public company.

“In a world of tighter-for-longer battery supply, we think VW is taking the right choice to secure cells for its aggressive EV rollout and reach a stronger negotiating position,” said UBS.

Investors may have long forgotten that before the emissions scandal, back in 2013/14, the market was happy to value the stock at 8-9 times earnings, said analysts at JP Morgan, which at the time reflected VW’s major technology hurdles, strong management team, strong free cash flow, and what was seen as the best exposure to China.

This momentum seems to have been regained, JPM observed in a note this morning, as a result of the ID family launch, the return of a more stable management structure, alongside the company’s recent guidance for free cash flow of at least €10bn for the 2021 financial year.

A 8-9x P/E multiple of 2022 forecast earnings per share of €28, is “still a reasonable multiple” for the VOW3 shares, JPM said.

“The release of a cheaper version of its ID.3 electric car could also help it give Tesla’s Model 3 a run for its money, as it’s considerably more affordable," said analysts at Hargreaves Lansdown.

“VW may have a head start in China, the world’s largest market for EVs given the group’s existing manufacturing and dealership networks in the country. However the transition to electric without diluting more profitable petrol and diesel sales is likely to prove a tough balancing act," they added.

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