Continental shares rise on UBS upgrade, spin-off plan By Investing.com

Investing.com — Shares of Continental AG (ETR: ) rose on Tuesday after UBS upgraded its rating to “buy” from “neutral”. The modernization was primarily driven by Continental’s plans, particularly the proposed spin-off of the Automotive division (NewCo).

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

UBS analysts based their upgrade on a thorough assessment of Continental’s strategic direction. In early August 2024, Continental announced its intention to completely spin off the automotive division by the end of 2025.

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

The note pointed out that the spin-off will likely allow Continental to leverage its strengths in the tire industry and optimize capital allocation, which could lead to substantial returns for shareholders.

UBS analysts estimate the spin-off will allow Continental’s RemainCo to become a very attractive cash-return story.

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

The brokerage estimates that after the spin-off, RemainCo could distribute around 6 billion euros between 2025 and 2027 through dividends and share buybacks.

This projection translates to a potential dividend yield of around 6% and suggests that up to 30% of Continental’s market capitalization could be bought back, assuming the stock’s current price.

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

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

UBS raised its target price for Continental shares to €80 from €67 following the proposed split.

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