Continental shares soar on UBS upgrade, spin-off plan

Investing.com -- Shares of Continental AG (ETR:CONG ) rose on Tuesday after UBS upgraded its rating to "buy" from "neutral". The upgrade was primarily driven by Continental's plans, especially its proposed spin-off of the Automotive division (NewCo). 

At 5:33 am (0933 GMT), Continental AG  was trading 4.4% higher at €62.42.

UBS analysts based their upgrade on a thorough evaluation of Continental's strategic direction. In early August 2024, Continental announced its intention to fully spin off its Automotive division by the end of 2025. 

This move, according to UBS, is expected to significantly enhance shareholder value by enabling a more focused approach to the remaining core businesses—Tires and ContiTech. 

The note emphasized that the spin-off would likely allow Continental to leverage its strengths in the tire industry and optimize capital allocation, which could result in substantial shareholder returns.

UBS analysts project that the spin-off will enable Continental's RemainCo to become a highly attractive cash return story. 

“We believe RemainCo could become a highly attractive capital allocation story and has scope for shareholder return via dividends and share buybacks to the tune of c€6bn (>50% of current market cap) over 2025-27E,” the analysts said.

The brokerage estimates that post-spin-off, RemainCo could distribute approximately €6 billion over the period from 2025 to 2027 through dividends and share buybacks. 

This projection translates to a potential dividend yield of about 6% and suggests that up to 30% of Continental's market capitalization could be repurchased, assuming the current share price.

The financial outlook for RemainCo is further bolstered by its operational efficiency and industry-leading asset turnover. 

UBS projects an EBIT margin for the Tires division to reach around 15.3% by 2025, which would place RemainCo among the top performers in the industry.

UBS has raised its price target for Continental's shares to €80, up from €67, following the proposed spin-off. 

This new target reflects the combined value of Continental before and after the spin-off. As per the note, the Tires and ContiTech businesses (RemainCo) could be worth between €80 and €120 per share, representing a potential upside of 30% to 100%. While the Automotive division (NewCo) faces challenges, it is estimated to be worth between €15 and €25 per share, considering potential risks.

Source: Investing.com