Accelerating Profits With High-Margin SUV Push And Global Hybrid Expansion

Key Takeaways

• Strategic shift toward high-margin SUVs and hybrids is expected to boost revenue and operating margins, despite challenging market conditions.
  
• Expansion in auto finance and strategic operations like Metaplant and potential India IPO may enhance earnings and shareholder value.
  
• Decreased global sales, rising costs, and quality issues, alongside geopolitical and economic uncertainties, threaten Hyundai's revenue and profitability.

Catalysts

Manufactures and distributes motor vehicles and parts worldwide.

• Hyundai Motor is focused on improving its sales mix by prioritizing high-margin SUVs and hybrid models, which is expected to positively affect revenue and operating margins.
  
• The ongoing expansion of Hyundai Capital's auto finance business, particularly in the U.S., indicates potential earnings growth through increased installment and lease income while supporting vehicle sales.
  
• Hyundai Motor's efforts to capitalize on FX rate impacts and raw material cost reductions may enhance net margins despite challenging market conditions.
  
• The strategic focus on hybrid vehicle sales globally, with higher expected profitability compared to traditional ICE vehicles, suggests a positive impact on overall profit margins.
  
• Initiatives like the Metaplant operation in the U.S. and the potential completion of an India IPO provide opportunities for future revenue growth and shareholder returns.

Hyundai Motor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hyundai Motor's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 7.7% in 3 years time.
• Analysts expect earnings to reach ₩14689.0 billion (and earnings per share of ₩54772.12) by about November 2027, up from ₩11556.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₩8831.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2027 earnings, up from 5.0x today. This future PE is lower than the current PE for the GB Auto industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 0.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.1%, as per the Simply Wall St company report.

Hyundai Motor Future Earnings Per Share Growth

Risks

• Decreased sales in global wholesale and retail markets, including a significant 9.5% drop in Europe, indicating weakened demand, particularly for EVs, which could impact revenue growth.
  
• Operating profit decreased by 6.5% year-on-year, affected by increased incentives and SG&A expenses due to intensified global competition, potentially impacting net margins.
  
• The need to provide provisions for warranty extensions, particularly ₩320 billion for the Lambda II engine, indicates potential quality and reliability issues, which can negatively affect earnings due to increased costs.
  
• Ongoing geopolitical risks and uncertainty in government policies, such as fuel efficiency regulations, could further decrease sales or increase operational costs, impacting Hyundai's profitability and net margins.
  
• Increased interest and provisioning costs in the finance division amidst uncertain economic conditions may place further pressure on the company's earnings and financial stability.

Valuation

• The analysts have a consensus price target of ₩328773.93 for Hyundai Motor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩380000.0, and the most bearish reporting a price target of just ₩250000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩191808.5 billion, earnings will come to ₩14689.0 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 12.1%.
• Given the current share price of ₩218500.0, the analyst's price target of ₩328773.93 is 33.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.