Daimler’s full year results certainly caught the market by surprise. At €2.6bn, the group’s net loss came in significantly worse than expectations of a €1.9bn loss, and well below the €1.4bn net profit recorded in FY08. Revenues for FY09 fell by 20% YoY to €78.9bn, while EBIT came in at a loss of €1.5bn, versus a profit of €2.7bn in the prior year period. It was hardly surprising, therefore, that immediately after the results release, Daimler’s share price tumbled by around 7%, partly driven by the news of a dividend payment suspension. Its cash bonds also moved about 5bps wider. But while we acknowledge that 2009 was a difficult year, and that headwinds remain for 2010, there are several reasons why we are not overly concerned about these results from a credit perspective.

Firstly, the majority of Daimler’s losses were reported in H109, while H209 saw a marked improvement. In Q1 and Q2, Daimler’s total EBIT came to negative €2.4bn, while Q3 and Q4 saw Daimler report positive EBIT of €918mn. The key driver of Daimler’s operating performance, its Mercedes-Benz Cars division, saw its EBIT rise to €355mn in Q3, from a loss of nearly the same amount in Q2, with EBIT rising a further 71% between Q3 and Q4 to €608mn. This division’s EBIT margin rose to 5.3% in Q4, from 3.5% in Q3 and a negative EBIT margin of 3.3% in Q408. We expect this positive trend in EBIT to continue in 2010. Daimler is forecasting Mercedes-Benz Cars to report EBIT of more than €1.5bn for 2010, which would be well ahead of the €500mn loss for FY09, although behind the €2.1bn reported in FY08.

Mercedes-Benz Cars EBIT development

Source: Company data.

Secondly, Daimler’s cash generation was impressive, with the industrial business reporting €2.7bn in free cash flow in FY09, versus cash outflow of €3.9bn in FY08. This was driven by effective working capital management, leading to significantly lower inventories, which more than compensated for the lower earnings. In addition, the capital increase carried out in March 2009 led to a cash inflow of nearly €2bn. As such, net liquidity of the industrial business increased by €4.2bn over the year to €7.3bn, a solid result compared to major peers.

Daimler’s net liquidity development (€bn)

Source: Company data.

Clearly the auto sector as a whole will continue to face challenges in 2010, not least because the cessation of the government incentive programmes could lead to a pull back in sales and that overcapacity problems have still not been addressed. We also note that Daimler has little financial leeway at its current ratings level for any deterioration in sales or profitability in the coming months. However, we continue to believe that Daimler remains well placed, particularly compared to its French peers, to withstand the headwinds it faces in 2010. Daimler’s premium-end focus means that it is less exposed to any potential retraction of sales as incentives end compared to other volume manufacturers. And its strong cash generation over 2009 have bolstered its liquidity position and should alleviate any immediate concerns from the rating agencies, although we acknowledge that Daimler’s cash flow situation this year will be much tougher as production and inventories ramp up. Daimler has also shown that it is adept at surviving in tough conditions, as proved by the €5.3bn in countermeasures realised in FY09, well ahead of its original target of €4bn. This was driven by a reduction in material expenses, strict cost discipline and a substantial reduction in labour costs through various measures, some of which will remain in place in H1 2010. Daimler itself outlined a more positive outlook for 2010. The group expects a rise in both total unit sales and revenues, and is also targeting EBIT of more than €2.3bn from its ongoing businesses this year.

Nicola Sanders, Credit Analyst

Disclaimer:

This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at http://www.daiwausa.com/.

Investment Banking Relationships; Daiwa Capital Markets Europe Limited or an affiliate has managed or co-managed a public offering of securities in the past 12 months, or has received compensation for investment banking services in the past 12 months: Daimler.

The statements in the preceding paragraphs are made as of February 2010.

For more details, please contact:

Nicola Sanders, Research Division
Daiwa Capital Markets Europe Limited
5 King William Street, London, EC4N 7AX

+44 (0)20 7597 8329

nicola.sanders@uk.daiwacm.com

For up to date Research analysis, see our blog site here.

Sign up for news/events alerts