The European auto parts sector looks stable with a steady stream of global light-vehicle sales, while the global beverage industry’s outlook also remains stable, thanks to expected growth in brown spirits and craft beer sales, according to reports released today by Moody’s Investors Service. Meanwhile, a Brexit “no deal” could bring new risks to the U.K. port sector.
European Auto Parts
Moody’s expects 2017 organic revenue growth for the European auto parts sector to achieve approximately 4.5%, and then to slow to 3.5% in 2018. The growth will be driven by global light-vehicle sales. This year, vehicle sales should grow 1.3% and 1.5% in 2018, which is still a large drop from the 4.1% gain realized in 2016.
"European auto parts suppliers will continue generating revenue growth in excess of global light-vehicle sales as stricter carbon emissions enforcement, consumer demand for improved safety features and the development of autonomous driving technologies drive more content per vehicle and underpin the stable outlook on the sector," says Matthias Heck, vice president, senior analyst at Moody's.
EBITA should remain robust in 2017 at 4.5% to 5% and 3.5% to 4% in 2018, Moody’s said. Free cash flow generation among European auto suppliers will improve through 2018 as revenue growth slows and working capital levels improve. “However, capital expenditures and R&D spending will remain high in the sector, constraining free cash flow at about 2% of sales in 2017 and 2018, which is in line with the historical five-year average,” Moody’s analysts said.
Premium brands and innovation are supporting higher prices in the sector, while portfolio mix will offset volume challenges in some categories, said Moody’s in a separate report. Also, large M&A transactions are likely to bring more efficiency to support operating growth. "We expect overall operating profit to grow 4% to 5% over the next one to two years, based on low single-digit sales growth," said Linda Montag, a Moody's senior vice president.
Some commodity cost inflation for beverage companies is also anticipated in the year ahead, Moody’s said. Brown spirits and premium beers are expected to drive growth in the sector, while carbonated beverages and mainstream beers will continue to challenge sales growth. Still, both of the latter categories have room to grow in emerging markets.
A “no deal” scenario regarding Brexit would complicate matters for the U.K. port sector, which currently sees frictionless, custom-free EU trade, another Moody’s report concluded. Chances of a “no deal” do remain substantial, though Moody’s predicts the U.K. and EU should find some agreement that maintains many of the current arrangements.
"While a Brexit 'no deal' presents a risk, the impact would vary depending on a port's diversification and traffic mix. For example, non-EU-reliant ports, like Felixstowe, and diversified port groups such as Associated British Ports, are less exposed than single ports that rely on EU traffic, like the Port of Dover," said Joanna Fic, vice president and senior credit officer at Moody's.
The “roll-on roll-off” ferry ports and the Channel Tunnel are the most exposed to a no-deal Brexit. Ferry ports such as Dover and Holyhead, as well as Groupe Eurotunnel SE, have little or no room to accommodate delays in the movement of passengers or trucks, Moody’s said.
Container ports would have a more mixed response to such pressures. A change in trade flows could benefit some ports, including on the east coast, as ports that rely on “feeder services” from the EU could be exposed to a shift in volume to larger ports if tariffs and customs became an issue.
Large and diversified ports are the most sheltered from a no-deal storm. Ports with available land, for instance, could develop port-centric activities such as warehousing to support just-in-time deliveries, Moody’s said. “However, this would require adjustments in the supply and logistics chain, a complex and uncertain process, and port companies would need to make investments without visibility on future volumes and returns,” analysts said.
– Nicholas Stern, managing editor