Continental AG Shares Rise After UBS Upgrade

Shares of Continental AG (ETR:CONG) increased on Tuesday following UBS’s upgrade to “buy” from “neutral”. The upgrade was influenced by Continental’s plans, particularly its intended 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 comprehensive evaluation of Continental’s strategic direction. In August 2024, Continental announced plans to fully spin off its Automotive division by the end of 2025.

UBS anticipates that this move will significantly enhance shareholder value through a more focused approach to its core businesses—Tires and ContiTech.

The note highlighted that the spin-off would likely allow Continental to leverage its strengths in the tire industry and improve capital allocation, potentially resulting in substantial shareholder returns.

Analysts project that the spin-off will turn Continental’s remaining company (RemainCo) into 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 €6bn (>50% of current market cap) over 2025-27E,” stated the analysts.

The brokerage estimates that post-spin-off, RemainCo could distribute roughly €6 billion through dividends and share buybacks from 2025 to 2027. This projection indicates a potential dividend yield of about 6% and suggests that up to 30% of Continental’s market capitalization could be repurchased, based on current share prices.

RemainCo’s financial outlook is further enhanced by its operational efficiency and industry-leading asset turnover. UBS forecasts an EBIT margin for the Tires division to reach approximately 15.3% by 2025, positioning RemainCo among the top industry performers.

Price Target Increase

UBS has also raised its price target for Continental’s shares to €80, up from €67 following the announcement of the spin-off. This revised target considers the combined value of Continental before and after the spin-off.

According to the note, the Tires and ContiTech businesses (RemainCo) might be valued between €80 and €120 per share, suggesting a potential upside of 30% to 100%. In contrast, the challenges faced by the Automotive division (NewCo) are estimated to assign it a value between €15 and €25 per share, factoring in potential risks.