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Q3 2022 hedge fund letters, conferences and more
What’s interesting about Daimler Truck is that 99.9% of the shareholders approved the spin-off
Highlights:
- Spin-off allows for enhanced focus on profitability
- Leveraging Asian footprint to drive top-line growth
- Strategic partnership to bring autonomous driving forward
Download the full report as a PDF
Restructuring of the business
- Daimler Truck became a public listed company in December 2021
- Shareholders of former Daimler AG (now: Mercedes Benz AG) approved to spin-off the truck segment
- The car segment Mercedes Benz and Daimler Mobility operate now under Mercedes Benz AG
What is an equity spinoff?
- In an equity spinoff, a company decides to create a new entity out of its existing operating business
- The newly created shares are distributed to the existing shareholders (unlike in a carve-out where the company sells its share in an IPO and raises new capital)
- The idea is that two independent companies are worth more than the single entity
Revenue breakdown 2021
Spin-off allows for enhanced focus on profitability
- Daimler uses “Value added” as the most important performance measurement
- Page 43 of the annual report
- “Value added shows the extent to which the Group and its divisions achieve or exceed the return requirements of the investors, thus creating additional value.”
- In recent years, Daimler has not added any value
Analyst consensus expects convergence in profitability
- Compared to its competitor Volvo, Daimler Truck has shown a worse gross margin
- With the spin-off management hopes that each segment can focus on improving its profitability
- Analyst consensus is optimistic that Daimler Trucks can catch up fast and improve its gross margin
Increasing profitability is No.1 priority
- In 1Q22, Daimler Truck revealed its plan to reduce costs and boost margins
- It aims to reduce fixed costs by 15% by 2025
- It also wants to reduce CAPEX and R&D expenditures by a similar amount
Leveraging Asian footprint to drive top-line growth
- Daimler Truck aims to expand its market position in China as it expects higher growth than in other regions
- Therefore, it has established local brands to meet the different countries’ requirements
- Heavy duty trucks are still relatively underpenetrated in Asia, providing robust growth prospects
Strategic partnership to bring autonomous driving forward
- In 2020, Daimler entered a strategic partnership with Nvidia, the world’s largest maker of AI chips
- Nvidia’s chips are currently the most advanced in the market
- From 2024 onward, the company will roll out a fleet with fully automated driving functions
Consensus is bullish
- Almost every analyst has a BUY recommendation and believes that the spin-off allows for enhanced value creation
- Analysts predict stronger gross margins which are converging to competitors’ levels
Get financial statements and assumptions in the full report
P&L – Daimler Truck
- Strong rebound in revenue expected as demand for trucks is higher than supply given the current supply chain constraints
Balance sheet – Daimler Truck
- Net fixed assets increase slightly as no huge expansions are planned
- Daimler Truck has moderate-to-high leverage with a debt-to-equity ratio of 1x
Ratios – Daimler Truck
- The company announced to follow a 40% dividend payout policy with effect from January 2022
- I expect Daimler Truck to return to positive FCFF after it was negative in 2021
Value estimate – Daimler Truck
- In contrast to consensus, I expect that it takes longer for Daimler Truck to improve its margin
- I value the company by using FCFF and a terminal growth rate of 2%
Key risk is supply chain
- Ongoing supply chain disruptions create shortages (e.g., semiconductor chips) and increase production costs
- Failure to keep up with technological changes could result in loss of market share
- Labor shortage of specialist employees creates competition among car manufacturers
Conclusions
- Analyst might forecast drastic changes in fundamentals too early
- In the long run, it should be able to close the gap to competitors in terms of profitability
- Valuation does not look expensive
Download the full report as a PDF
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