Volkswagen punctures its reflating shares with new admissions excuses

Updated 13:09 GMT

Volkswagen has managed to upset what was beginning to look like a recovery by its shares with two new twists on emissions cheating.

This underlines our main view that regardless of apparent pauses in the intensity of VW’s defeat device debacle, it’s going to be a long time before the full extent of the internal cost is known.

The battered car maker’s preference stock tumbled as much as 10% at the start of Wednesday’s trading after it admitted it had understated the fuel consumed by 800,000 cars sold in Europe.

This will cost an additional €2bn, after the group set aside €6.7bn in Q3, to cover anticipated penalties for fiddling pollution tests.

Or at least €2bn is the figure VW gives—the more widely held view is that provisions and the late-night impact assessment from VW’s latest admission, will be revised higher.

Around €35bn has emerged as widely assumed ‘fair case’ figure for emissions damages and costs.

A cloud over Wolfsburg

Unfortunately, there now seems only a moderate guarantee that VW’s first self-admitted transgression since the pollution scandal began is the bottom of that issue.

On the face of it, it appears to represent a degree of governance progress in that Wolfsburg, Lower Saxony’s most infamous resident disclosed a car problem itself, without having to be forced.

But the smell of suspicion still hung in the air, after US environmental watchdogs who first blew the whistle on suspect tests made fresh allegations on Monday.

The Environmental Protection Agency (EPA) now says VW also cheated in emissions tests on certain larger luxury cars that weren’t initially implicated.

SUV stink

The latest Volkswagen Group vehicles to cause a stink include the 2014 Touareg, 2015 Porsche Cayenne, and 2016 Audi A6 Quattro.

The watchdog said on Monday these 3L SUV-style cars showed nitrogen oxide (NOx) levels as much as nine times higher than permitted.

Unfortunately, judging from its reaction to the EPA’s latest claims, VW might not have learned all the lessons from earlier developments in the on-going debacle.

The 70-year old group’s reputation is in tatters and its stock down 30% since September, after it admitted deliberately falsifying diesel vehicle emissions tests.

But VW insisted on Monday the latest suspect pollution readings uncovered by the EPA were down to a “software function which had not been adequately described in the application process”.

“No software has been installed in the 3-litre V6 diesel power units to alter emissions characteristics in a forbidden manner,” the group said.

VW’s Porsche Holding GmbH subsidiary also expressed “surprise”.

The diesel-fuelled Porsche Cayenne version was “fully compliant”, according to “all of” Porsche’s “information” it said.

10,000 vehicles sold in the US since the 2014 model year (2013) are in question, according to the EPA, and a further unknown number of vehicles from 2016 model year, which went on sale in recent months.

The relatively small number of SUV-style vehicles and others covered by the latest issue seemed to prevent the stock falling hard on Monday.

But the cumulative effect of the latest ‘Emissions Gate’ twist and 800,000 further European cars in question could shear off repairs done to VW stock.

Separately, a vehicle recall Volkswagen notified US and Canadian regulators about on Wednesday will add extra weight to its shares.

VW said it would recall certain vehicles with 1.8T and 2.0L gasoline engines in December.

VW’s ‘Beetle’ was produced between 1938-2003. Photo by Jairo Bud, 2008

It’s due to the suspicion that their camshaft lobes may break and reduce engine and brake power.

It’s not yet known how many cars could be affected.

Overall, whilst there are encouraging signs of change, there is still scant evidence that Volkswagen Group’s efforts to improve governance are enough to inspire confidence in its word.

On that basis, we think on-going developments should prevent any material share price recovery.

The ordinary shares had already swerved, before the latest VW news, from a test of the marker representing recovery of an important portion of its ‘Emissions Gate’ losses, between 18th September and 5th October.

DAILY CHART

Please click image to enlarge

The 61.8% Fibonacci of that stretch corresponds to €139.71.

Since failing a little below that, the shares have once again been sticky within the reinstated channel that has contained price action since March.

A further chance for a bounce may come from the upper bound of consolidation resistance-turned-support from late September-early October (€108.7).

But a disruptive collapse of the channel risks a return to the ‘Emissions Gate’ low at €95.

Accelerating downside momentum (‘Slow Stochastic’ sub-chart) adds risks to the current sell-off.

Even if renewed loss of sentiment remains orderly, the descending channel tends to corroborate our view that it’s too early for a share price recovery.

At best, another visit to €108 in the near-term seems unavoidable.