Daimler: Trucks Spin Off And New EV Strategy Still Offer Promising Upside

Daimler AG is one of the major German producers of passenger cars, trucks, vans and buses. Mercedes-Benz, a subsidiary of Daimler, offers premium and luxury vehicles under a number of Mercedes brands. On the other hand, Daimler Trucks and Buses offers commercial transport, while Daimler Mobility provides financing and leasing packages.
Of course, Daimler will face one of the greatest challenges in Q3 as semiconductor shortage take a direct toll on sales volumes and thus profitability. Car sales decreased by almost 2 times YoY in September. However, we expect that pricing power and low share of fixed costs will actually be able to compensate for some of the challenges.

In spite of all this challenges Daimler has so far demonstrated excellent financial performance:
  • Daimler has high current FCF yield (up to 9.9% in 2022FY) which brings company to low durations stocks basket;
  • Relatively low PEG ratio (PEG < 1);
  • Net cash position with strong liquidity;
  • Huge BEV CAPEX program pressure FCF in next years;

Furthermore, Daimler has another room to upside. Daimler shareholders on October 1 voted in favour of spinning off the company's truck division Daimler Truck Holdings AG, with shares in the new company to start trading in December. The shareholders will hold 65% stake in Daimler Truck Holding AG intended to list on the Frankfurt Stock Exchange, in addition to their shares in Daimler AG. In an optimistic scenario, it can even be added to the DAX index what attracts the interest of index funds.
Looking forward to a comment from the company's management during the announcement of the financial Q3 results on 29 October 2021.
Attractive valuation:
  • To assess the impact of Daimler Truck spin off, we made some of the parts (SOTP). Despite a rather conservative assumptions, Daimler has a room to potential upside up to 36% for next 12 month.
  • DAI has relatively low multiples comparing with peers (P/E = 6.37 X).
  • Daimler traditionally is traded with premium to the peer group, but after pandemic situation has changed. Despite Daimler’s shares rally over the past 2 weeks, there is significant discount relative to American automakers.

Furthermore, due to impressive EV strategy update in July 2021, Mercedes spend on electrification looks competitive with peers. Furthermore, strong pipleine of new EV enounces brings upside potential. Daimler accelerates BEV transition announcing that it is going to be the first traditional OEM to be 100% electric globally and intends to team up with new European partners to develop and efficiently produce future cells and modules
Daimler remains our top pick within premium OEMs benefiting from a clear catalyst, the upcoming Daimler truck spin-off.

We overweight DAI due to high exposure to long-term secular trends, strong financials and Spin-off of Daimler truck division, which still provides reasonable upside regardless of short-term risks of supply chain disruptions and chip-shortage.

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