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PSA shares slump on H2 fears after strong first half

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PSA shares slump on H2 fears after strong first half

July 28, 2010 08:16 CET

PARIS (Reuters) -- PSA/Peugeot-Citroen warned its second-half performance would be hampered by a tougher economic environment, sending its shares lower even though it swung to a first-half profit.

PSA shares opened 1.3 percent higher, after the group posted strong first-half results, but later fell sharply, trading 3.74 percent lower, underperforming a 0.49 percent drop in the Stoxx 600 European Autos index.

Carmakers hit hard by an industry crisis are increasingly relying on growth in emerging regions like China and Latin America, as signs of an underlying recovery in car demand in Europe are offset by fading scrappage schemes.

PSA expects its automotive division to be "close to break-even" in the second half, despite seasonality and "more difficult market conditions" for the rest of the year in Europe where scrapping schemes are grinding to a halt.

CEO Philippe Varin, however, cautioned PSA would have to cope with a tougher economic environment in the second half.

"The economic context had a positive impact in the first half. Clearly the economic context is going to be less favourable, and will have a negative impact in the second half," Varin told a news conference.

Barclays Capital analysts feared the "second half outlook is over optimistic". Despite PSA's good model line-up and accelerated cost-savings compared with what it had planned, "we remain more cautious than the company on the outlook for H2 2010," they wrote in a research note.

Morgan Stanley analysts wrote "strong H1 results from PSA may not be enough to support the stock given its +36 percent run since late May" and added that 2011 remained the "key debate"."We believe consensus wrongly assumes a linear recovery for PSA in 2010-12 -- we see earnings falling in 2011."

PSA said it was aiming for a full-year recurring operating income of 1.5 billion euros ($1.94 billion). Previously, citing uncertainty, it had simply forecast "significant" first-half operating income.

The company, which last year launched a plan to boost profitability, partly through emerging market growth, said it was confident it would make half its vehicle sales outside Europe by 2015, compared with a third at the start of the year.

It now sees the European market as a whole falling 7 percent in the full year, compared with a previous forecast of a 9 percent fall, PSA said in a statement on Wednesday.

The company repeated it expects the Chinese market to show double-digit percentage growth while the Latin American market should see high single-digit growth this year.

PSA this month reported a rise in first-half vehicle sales, boosted by new model launches and strong growth in China, where it signed a joint venture deal with China's Changan, building on its existing partnership with Dongfeng.

Ahead on performance plan

PSA posted first-half recurring operating income of 1.137 billion euros, compared with a recurring operating loss of 826 million euros in the year-earlier period.

Bernstein analysts wrote in a research note that the recurring operating income significantly beat their forecast.

"We believe it is possible that PSA could produce better results than most expect in the medium-term if it can hold on to recent market share gains and drive down structural costs even further," they wrote.

Cost savings of 854 million euros in the first half against a target of 1.1 billion euros for the year, set out in the performance plan, helped improve recurring operating income, the company said. Varin did not rule out beating the 2010 target.

First-half operating income for the group reached 1.068 billion euros, up from a 1.332 billion operating loss in the year-earlier period. Net income rose to 680 million euros against a loss of 962 million euros a year ago.

Talks continued about paying back early a third of the 3 billion loan PSA, like rival Renault, received from the French government to help it through the crisis, the company said.

Renault reports half-year results on Friday.

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20100728/ANE/307289975/1317#ixzz0uzBlS0aG

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