Volvo (AB) (VOLV B) Series B NPV (CDI)

Volvo’s first quarter net sales were on the same level as last year, coming in at SEK131.2bn. This included flat sales in the important truck business. The group saw a 10% reduction in truck deliveries in the quarter and the order intake fell by 19%. The group expects production to be scaled back in-line with these changes by the end of the second quarter.

Underlying operating profit fell to SEK18.2bn from SEK18.6bn last year, including a SEK840mn increase in research and development spending. Operating cash flow was SEK4.9bn, compared to an outflow last year. This includes the acquisition of a battery business from Proterra Inc, and an investment in a logistics electric vehicle joint venture with Renault Group and CMA CGM Group. Net debt stood at SEK34.1bn as at the end of the period.

CEO Martin Lundstedt said the group would continue to focus on “volume flexibility” and “tight cost control”.

The shares rose 2.3% following the announcement.

Our view

Volvo Group is a truck and industrial equipment giant. There are millions of Volvo trucks, buses and machines rumbling around.

Volvo not only produces vehicles, but services them. A 24/7 global servicing support network is a serious asset. If your truckful of goods is stuck somewhere, you need to have faith it can get moving ASAP. That feeds into more reliable revenue. Services currently make up a small part of overall revenues, and is expected to increase to over 50% by 2030. We think this target is achievable. We're pleased to see momentum in this area's continued in the first half.

Longer-term we admire the group's high barriers to entry. Volvo's manufacturing and supply chains are enormous helping to protect market share. Volvo has enviable visibility over demand. The order intake for trucks was well over 200,000 last year as customers replaced old trucks and expanded their fleets.

The group's also benefiting from growing e-commerce (those extra online orders mean increased need for logistics). Volvo is also a leader in the electrification of heavy-duty vehicles, including trucks and buses. Volvo wants over 35% of its vehicle sales to be electric by 2030. We view being a front-runner of sustainable haulage a real plus point.

The steadier style of Volvo's revenue helps its ability to pay dividends, currently offering a prospective 6.0% dividend yield. Please remember nothing is guaranteed. Overseas dividends can be subject to withholding tax which might not be reclaimable.

For all the positives there are some things to monitor, relating to Volvo's large exposure to global economic activity. Underlying demand is waning, with some customers becoming more cautious. This includes a double digit drop in truck orders, which is partly a result of Volvo actively managing its backlog, but it also shows a level of nervousness and economic weakness.

But it’s important to recognise this could become a more contracted decline before it gets better, and this could cause some knocks to the valuation. In the case of a severe slowdown, we can't rule out cuts to the dividend, but this would be a drastic measure.

The group is doing a reasonable job at flexing its production capacity to meet lower demand, which is the right move to protect the bottom line. But broader cost cutting is also on the agenda. Trimming fat is no bad thing, but this is something we’ll be keeping an eye on. If cuts look drastic, or very deep, it can trigger questions about whether enough is being spent to fund Volvo’s ambitious electric targets.

We view Volvo as a steady-Eddie with longer-term growth potential. Operational progress has been outstanding, but the wider economic environment shouldn't be ignored and ups and downs along the way can't be ruled out.

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