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Share prince: EUR 7.94 Target price: EUR 12.25 Target Price unchanged
Here to be allowed to step up investments
The facts:
At a Mercedes Benz event in Portugal last week, Daimler CEO Zetsch confirmed that the consortium (Daimler, BMW and Audi) was in talks with various OEMs and Tier1s about taking a stake in Here. According to Reuters, Renault-Nissan and Continental are contemplating a stake with CEO Zetsch adding that “interest will not only be limited to Renault-Nissan and Continental”. CEO Zetsche also states that “it is clear that we [the consortium] want to aggressively expand this platform [Here] and we will make the means available to do this”. Acquisitions are apparently also a possibility. Closer cooperation between the Here consortium members is also in the cards as “when it concerns navigation, we have broadly identical needs” according to Daimler CEO Zetsch.
Our analysis:
We do not fully understand why any OEM or Tier1 would want to lock in capital by acquiring a 5% or more stake in Here. Here is currently the market leader in Automotive maps so most if not all OEMs and Tier1s already work with Here and haver been for many years. As the consortium that owns Here will want to maintain those relationships (it is after all a company that needs to make a profit and a decent return), competing OEMs are practically assured of getting access to Here maps if they so desire, now and in the future. And with Daimler (for the majority of its models), BMW and Audit are still firmly in the Here camp, Here will be allowed to invest in the quality of its maps because otherwise the owners themselves will suffer. So frankly, we do not see any reason to invest.
But even if OEMs and Tier1s invest in Here, it is likely, looking at the industry practices today, that most will want to maintain a dual sourcing strategy as that leads to a better bargaining position. Taking a stake in Here does not necessarily mean that the market share of Here will increase or that TomTom will be hampered in gaining market share. If TomTom offers better quality for the same or lower price, it will gain the business.
What is worrying is the statement of the Daimler CEO that the consortium wants to aggressively expand the Here platform and that it will make the necessary funds available. As a clear market leader in Automotive grade maps, Here has been resting on its laurels , benefitting from a better plain vanilla turn by turn navigation database. But TomTom has invested heavily in a new automated map update process and their market leading Traffic services. Combined with RoadDNA, TomTom has clearly taken a lead in the development of HD maps and the technology roadmap towards semi-autonomous driving. Here talks often about ADAS, HD maps and autonomous driving but there have been few tangible signs that R&D and product development efforts have stepped up. That may change. If Here is allowed to invest heavily , even if it means lower profitability in the near term, that could result in Here being able to catch up with TomTom earlier than expected, which would diminish its ability to gain market share, a key component of our investment case.
Conclusion & Action:
Other OEMs and Tier1s taking a stake in Here does not make any sense to us but if it happens, it is not expected to hamper TomTom’s ability to gain market share. What could have an impact is Here being allowed to invest heavily in its map database update process and the development of HD maps. TomTom has a clear lead in both, which is why we assume market share gains will continue, but if Here catches up more quickly, gaining market share will become more difficult. And that is a key pillar of our investment case for TomTom Automotive. We rate the shares Buy with a DCF based pt of EUR 12.25. FY17 EV/EBITDA is at an undemanding level of 7.3X relative to other Automotive and Fleet management solution providers.
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TomTom (Buy, pt EUR 12.25): Inrix moving to Tier1 position
Inrix, a key competitor of TomTom in the live Traffic services market, has announced the acquisition of OpenCar. OpenCar is a company that offers OEMs the ability to develop connected infotainment systems that are agnostic with regards to the consumers smart phone iOS. It effectively allows OEMs to offer its customers an Android in the Car or Apple CarPlay experience with the limitations of those two systems.
OEMs fully control the experience (which they do not in the case of Android in the Car and Apple CarPlay) and can adjust systems settings, functionality and app availability per brand, model and region. With this move, Inrix is positioning itself more as a Tier1 that also offers Traffic rather than just a component provider. Whether this move leads to less focus on the Traffic service remains to be seen but it can be beneficial to TomTom.
On the other hand, if the OpenCar platform gains popularity (and that is a big is given that there is still the issue of the limited battery life of smart phones and the low quality of GPS chipsets), it could have an impact on the sale of plain vanilla turn by turn navigation maps as Consumers will just opt for a vehicle with an OpenCar system and use their smart phone for navigation. Conclusion: a less focused competitor in Traffic could be beneficial but success of OpenCar could have a negative impact on plain vanilla turn by turn navigation maps.