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Daimler is dead, Long live Daimler Truck (OTC:DTRUY).
Daimler spun off Daimler truck into a separate entity. This was to “unlock the full potential of its businesses Mercedes-Benz Cars & Vans and Daimler Trucks & Buses in the future.” The allocation ratio of the spin off was 2:1, for every two shares of the old Daimler entity held, one share of Daimler truck was assigned to shareholders. We’re taking a closer look at what was previously the commercial vehicles segment of Daimler, a stock which we previously covered.
Before the spin off, Daimler group CEO Ola Kallenius said “Mercedes-Benz cars and Daimler Truck are different businesses with specific customer groups, technology paths and capital needs. We believe they will be able to operate more effectively as independent entities, equipped with strong net liquidity and free from the constraints of a conglomerate structure”. Also, ahead of the spin off, Daimler Truck was rewarded with solid investment grade ratings from Standard & Poor’s as well as Moody’s.
Investment case
The case for Daimler Truck is based on sectorial megatrends:
- The adoption of Zero Emissions Vehicles
- Autonomous driving solutions
Daimler Truck is positioning itself for the transition to Zero Emissions Vehicles with plans for Battery Electric Vehicles (BEVs) and Fuel Cell Electric Vehicles (FCEVs) in its sights. We see FCEVs remaining a niche market over the next decade while BEVs take the spotlight. With regulatory backing and improving costs, we predict that BEVs will reach total cost of ownership parity with diesel commercial vehicles around 2026.
Looking at Daimler Truck’s current and future ZEV offerings compared to peers, we are confident that the Company has an advantageous portfolio which will gain ZEV market share as the market grows. The Company also announced last month a joint venture with NextEra Energy Resources and BlackRock Renewable Power to accelerate public charging infrastructure for commercial vehicles across the U.S.
The sector’s holy grail though is in autonomous solutions. Autonomous solutions could potentially lower total operating costs for haulers by a third, through the elimination of drivers. Not only this, but the autonomous solutions can generate recurring revenue for the Group by being sold as a service. However technology is still being developed and there are large gaps in the regulation. Autonomous driving is currently classified in various levels from L0 to L5 with 0 being the lowest and 5 being the highest. Daimler Truck already has L2 autonomous vehicles which aid the driver with steering and braking on the market, but major OEMs are looking straight to L4 as the next breakthrough. The company has partnered with Waymo, Luminar and Torq Robotics for the development, and is investing “up to €0.5 billion into automated technology”.
Valuation and risks
With the management no longer having to focus on the autos division, the Company is free to focus on reaching its 2025 target of 10% EBIT margin. We believe that this is more than possible for the group when considering its current ’22 estimates of between 7-9%, and that it is on target to reduce fixed costs by 15%, two years prior to its 2025 target.
Moreover, CFO Jochen Goets further mentioned at the CMD “By maintaining discipline on capital expenditures, optimizing our capital allocation and improving our profitability we aim to continue generating strong free cash flows,” the company aims to use this as a platform to drive investments into new technologies and a dividend payout ratio of 40%.
We currently value the company with a EV/EBITDA of 5.8x which is much lower than our aggregate peer average. We see the company goals as very credible and give the stock an initial buy rating with a target price of €38.00 per share.
Key risks include:
- Supply chain shortages
- Key developments in fuel cell technology which could favour rivals
- Weakening truck orders
Source: https://seekingalpha.com/article/4491411-daimler-truck-all-aboard-the-megatrend
