Hyundai Motor Shares Tumble After Third Quarter Warnings Over Engine Issues

Shares of Hyundai Motor tumbled by as much as 7% on Tuesday after the South Korean automaker and its affiliate Kia Motors Corp. warned that costs of dealing with prior engine failures will lead to a nearly $3 billion charge to its third quarter earnings.

On Monday, Hyundai and its 34%-owned affiliate Kia said they would take a combined hit of 3.36 trillion won ($2.95 billion) related to failures in its Theta II GDI and other engine models which led to the recall of 1.7 million cars in 2015 and 2017.

Of that provision, Hyundai will account for 2.1 trillion won ($1.84 billion) and Kia will be responsible for 1.26 trillion ($1.1 billion).

The companies have now taken total charges of nearly $5 billion related to the engine issue.

As a result of the charge, analysts expect the automakers to post a third quarter loss.

"The amount of provisions Hyundai and Kia are declaring is getting bigger each year… and that is worrisome," said Kevin Yoo, an analyst at eBEST Investment & Securities, Reuters reported. "For the first time, Hyundai said other engines that have not been mentioned previously are now included in [the] provisions, possibly suggesting that more cost issues will continue after all.”

In addition to the new provisions, Hyundai also said it will recall 77,000 of its Kona electric cars due to issues with its battery cells – dealing a big blow to the company’s plans to switch to a more environmentally friendly product portfolio, including electric vehicles, hydrogen fuel cells and driverless cars. Hyundai has earmarked more than $35 billion to invest in its green endeavors over the next five years.

Angela Hong and Akash Gupta, analysts at Nomura, noted that investors will worry about Hyundai’s seemingly endless vehicle recalls and engine issues.

“We expect the Korean auto sector to face near-term headwinds until these unanswered questions are addressed by Hyundai Motor,” they wrote in a note.

But Kang Seong-jin, an analyst at brokerage KB Securities in Seoul, said Hyundai’s sales have been improving after suffering declines due to the impact of the coronavirus pandemic.

Hyundai and Kia are expected to release their third quarter results next Monday.