One of Australia's leading fund managers has just made a major new investment.
Antipodes Global Investment Company (ASX: APL) has revealed to the Motley Fool Australia that German automotive giant Volkswagen has recently become its top holding after the fund manager started buying shares in the company in mid-2020.
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What does Antipodes like about Volkswagen?
The Chief Investment Officer of Antipodes Partners, Jacob Mitchell, has provided readers with an insight into why the fund is bullish on the future of Volkswagen (VW).
He commented: "VW today is already one of the world's largest car makers, roughly on a par with Toyota, with a little over 10% of the global market. As the world transitions to EVs [electric vehicles], VW has the opportunity and scale to significantly increase that market share thanks to an all-in approach to electrification, while other legacy automakers have taken a more gradual approach."
Mr Mitchell believes that the auto giant is well-positioned to grow its market share and become the leader in both the European and Chinese markets.
"Based on currently available data, VW's share of the EV market in 2025 is likely to be significantly higher than its global market share in 2019 and with the number one position in Europe and China, which are expected to be the two fastest growing EV markets."
"Market share is critical to the future financial performance of the VW group. Automotive, like any business with a meaningful fixed cost base, is in part a game of scale, something which VW has in abundance," he added.
EV platform a point of difference
The Chief Investment Officer notes that Volkswagen has a point of difference in its EV platform.
He explained: "And it's not only VW's own volumes across all group brands over which they are able to spread the development costs. Other automakers lacking the resources or desire to develop an internal EV platform may choose to partner with VW, e.g. Ford is using VW's platform for European EV models. New market entrants like tech companies could also add volume and thereby spread costs. It is not inconceivable that VW could become a platform company, though this not our base case."
Internal battery production
Antipodes notes that Volkswagen has been forward-thinking and is aiming to reduce battery costs significantly in the future.
Mr Mitchell commented: "Management continues to take proactive and forward-looking decisions to protect the company against the changing landscape. In March this year, VW announced plans to internalise future battery production in partnership with its current battery suppliers. This partnership approach is a sensible one, reducing the capital cost to VW while securing supply."
"Battery cost deflation is a key contributor to the future profitability of EVs. Industry prices today are around $140/kwh but VW is targeting cost reduction of 30% to 50% by the end of the decade which will take battery cost significantly below $100/kwh at which point cost parity between EVs and combustion engine vehicles will likely be achieved," he added.
Valuation
Other key reasons for its inclusion in the fund are its exposure to the post-COVID-19 economic recovery and its valuation. Mr Mitchell believes the latter is very attractive.
The Chief Investment Officer explained: "VW is well-positioned to benefit from a meaningful post-COVID-19 rebound in economic activity and pent-up demand in the auto cycle, as the multi-year downcycle we've seen reverses. The company is also a great way to get exposure to the strong recovery in China given it is the leader in what is the world's largest auto market. Further, rising bond yields are likely to support relative valuations."
"At just 8x forward earnings, generating free cash flow of over $10bn p.a. – and that's post the investment into the electrification offensive – VW can transition to a secular growth winner as it dominates electrification. "
"By 2023 we expect VW's underlying earnings per share to be at least €35. Applying an undemanding PE multiple of x10 to this points to a fair value of €350 over the coming couple of years, and we see the possibility of upside to both the earnings and the applied multiple," he concluded.
