Renault in deep value territory

An alliance was formed with Nissan over 14 years ago and Renault ended up owning 43 per cent of the Japanese manufacturer and Nissan 15 per cent of Renault. Now, with Nissan's share price up by three-quarters inside a year, Renault's stake is worth substantially more - €16.5bn (£14.3bn) or €56 per Renault share. If Nissan hits broker Macquarie Capital's share price target, that figure would rise to almost €75 per Renault share. Meanwhile a 1.6 per cent stake in fast-recovering Daimler is worth almost €900m, or €3 a share.

Of course, demand in Renault's European heartland - France, Germany and Italy - has slumped and sales there fell by 7 per cent, or €1.1bn, during the first half. Chronic overcapacity remains an issue and a recovery is some way off. However, building Nissans in its factories will help here, and half of all Renaults now end up outside Europe. International sales grew 4 per cent to a new record, which meant the manufacturer still sold 1.3m vehicles worldwide, only 25,000 fewer than the year before. And that was despite a six-week shutdown at the Curitiba plant in Brazil, which cut sales in Renault's third-largest market by 8 per cent. However, it is back to full-speed again with capacity for an extra 100,000 vehicles. And a planned tie-up with China's Dongfeng Motor, which is rumoured to be imminent, would be a major boost to overseas trade, too.

Launching several new models and cutting costs easily offset a small decline in revenue to €20.4bn. That's why underlying operating profit grew by 15 per cent to €583m, which was much better than expected. Crucially, those new models and stricter pricing helped the automotive business make €211m, almost twice as much as last year, dumbfounding analysts who'd only pencilled in break-even.

And costs are set to keep falling. Renault introduced the so-called Monozukuri plan, borrowed from Nissan, which aims to cut the cost of building a vehicle by forensically examining each stage of the process. It saved more than €500m last year and a further €206m in the first half. A new modular system will slash costs, too. Platform sharing will save up to 30 per cent on parts and as much as 40 per cent on engineering and process spend.

Signing a competitiveness pact with French unions in March was crucial, too. In exchange for a promise not to shut any factories in its own backyard, workers agreed to a pay freeze, longer working hours and a 17 per cent reduction in headcount over the next three years. That will save another €500m a year by 2016.

True, a €512m writedown on its Iran operation and another €277m on vehicle programmes wrecked the bottom line, but those are one-offs and an extra €213m from Nissan took the Japanese company's profit contribution to €766m. It paid Renault €190m in dividends, too. Barring any further disasters, management thinks Renault will hit full-year forecasts for higher vehicle sales this year and positive automotive operating margin and free cash flow.

One further reason to be optimistic is Dacia. Sales of the Romanian budget marque bought in 1999 increased 16.5 per cent in the first half to over 211,000. In fact, Dacia is Europe's fastest growing automotive brand and, while Renault won't confirm it, operating margin is estimated at about 9 per cent, compared with the group average which has doubled to 1.1 per cent. Launching Dacia in the UK ramped up sales here by almost 16 per cent and international sales of its popular Duster model doubled to 142,600.