UBS analysts have expressed a positive outlook on Continental AG, a German automotive supplier, as the company prepares for the spin-off of its Autos division.

Positive Outlook for Continental AG

The analysts believe that the current market discount on Continental's shares will decrease as the spin-off nears completion. This strategic move is seen as a significant opportunity for the company and its shareholders.

Continental's shares are currently trading at a discount compared to its competitors, but UBS analysts project that this discount will narrow as the market recognizes Continental as a tire-focused entity. Their valuation model estimates that the RemainCo, which will focus on the Tires and ContiTech businesses, could be valued higher than its current market price.

The anticipated spin-off of the Autos division is also expected to enhance shareholder value. UBS's analysis indicates a strong financial outlook for Continental's RemainCo, with projected returns to shareholders through dividends and share buybacks. The analysts anticipate an increase in the dividend payout ratio, making RemainCo an attractive investment for income-focused shareholders.

The expected margin expansion in Continental's tire business is another factor driving the optimistic outlook. UBS analysts believe that RemainCo's operating margins could improve in the coming years, supported by cost-efficiency measures and an optimized production footprint.

Catalysts for Investor Confidence

Several catalysts, such as the release of fiscal year 2024 results and strategic announcements, are expected to boost investor confidence in Continental's spin-off and overall valuation narrative.

Continental's decision to divest its ContiTech OE business is aimed at enhancing RemainCo's profitability. While uncertainties remain, UBS analysts believe that the downside risks are limited and highlight the potential for mergers and acquisitions activity for NewCo.

As Continental focuses on its strengths in the tire sector and sheds non-core operations, the market's perception of the company is likely to evolve. The upcoming financial disclosures and strategic announcements will play a crucial role in shaping investor sentiment and driving the stock's performance.