TheChek News Flow

Special Situations: Alstom (ALO FP)

Asset disposals more important than results – BUY OPPORTUNITY

ALO FP: 24.00; Short-term initial target; Eur 26.00 January 21, 2014 Alstom reported 3Q FY2013/2014 results. The key take-away for us is the change in margin and cash flow guidance vis-à-vis the previous guidance. As per the latest guidance, ALO expects (i) the operating margins to decline “slightly” for the 2014/2015 period from the current level of ~7.0%. Previously (as of Nov 2013), ALO was guiding for a gradual increase in operating margins to 8% over the next two or three years. (ii) Negative cash flow for 2013/2014 period vs a previous positive expectation.

Certainly, the lowered guidance on operating margins is negative for the stock. The latest guidance suggests that the targeted margin recovery to 8.0% is pushed back further past 2016. We believe that this development is likely to force ALO management to push for more aggressive cost saving/restructuring measures to improve margins. In our previous report, we suggested that ALO’s cost cutting targets were not as aggressive as Siemen’s targets, hence room for a more aggressive stance. Also, a pickup in sector activity in Europe is likely to benefit ALO share price disproportionately vis-à-vis its peers. Hence, we believe that substantial downside risk to margins is limited.

On a balance sheet perspective, we note that ALO continues to target non-core asset sales, which according to the management is generating substantial interest from potential buyers. ALO is planning to generate €1Bn to €2Bn via asset sales and the management seems very optimistic (in today’s conference call) in achieving this target. Hence, guidance on negative cash flow does not worry us as we believe that the above asset sales should support the balance sheet flexibility of the group.

On a relative valuation basis, ALO seems fairly valued given the current estimates in its sector. ALO is also cheap vs SIE. ABBN seems to be slightly undervalued vs. ALO and SIE. Despite the fair valuations for ALO, we believe that upside to the share price could come in the form of higher than expected cost savings, aggressive non-core asset sales and pick-up in order activity. Hence, we set a short term price target of €26. This could increase north of €30, if the margin recovery picks up. On the other hand, we believe that downside from the current share price is limited. On this basis, we would remain buyers of ALO at current price levels. Risk Adjusted Efficient Price The table below shows our “efficient” price estimate for ALO. We estimate a target price of €25.9 assuming three scenarios:

· Bull Case estimates a target price (using our relative valuation model) of €28.5 assuming ALO achieves its stated OP Margin target of 8.0%.

· Base Case estimates a target price of €24.7 assuming that ALO experiences a slight improvement in OP Margin from 7.0% to 7.30%.

· Bear Case estimates a target price of €21.5 assuming that ALO OP margin drops to 6.5%.

Risk Adjusted Price.€ [cid:image003.jpg@01CF16C8.228ED510]

In other words, the correction brought about by the disappointing numbers is excessive in our view. We expect the stock to settle toward Eur 26 in order to be efficiently priced within the sector, and we recommend buying the stock in order to realize the valuation arbitrage. FULL REPORT ATTACHED

Asian Market Update: Australia CPI rises to top half of RBA target range; BOJ on hold with policy/assessment and more modest CPI and GDP expectations

***Economic Data*** - (JP) BANK OF JAPAN (BOJ) POLICY STATEMENT: REITERATES TO INCREASE MONETARY BASE AT ANNUAL PACE OF ¥60-70T (AS EXPECTED); Maintains overall economic assessment (5th straight month) - (AU) AUSTRALIA Q4 CONSUMER PRICES (CPI) Q/Q: 0.8% V 0.4%E; Y/Y: 2.7% V 2.4%E; CPI Trimmed Mean Q/Q: 0.9% (10-quarter high) v 0.6%e ; Y/Y: 2.6% v 2.3%e - (AU) AUSTRALIA JAN WESTPAC CONSUMER CONFIDENCE INDEX M/M: 103.3 V 105.0 PRIOR; M/M: -1.7% V -4.8% PRIOR (2nd consecutive decline) - (JP) JAPAN NOV FINAL LEADING INDEX CI: 111.1 V 110.8 PRELIM; COINCIDENT INDEX: 110.7 V 110.5 PRELIM - (JP) JAPAN DEC TOKYO CONDOMINIUM SALES Y/Y: 6.1% V 22.3% PRIOR - (JP) JAPAN NOV ALL INDUSTRY ACTIVITY INDEX M/M: +0.3% V +0.3%E - (TW) TAIWAN DEC UNEMPLOYMENT RATE: 4.1% V 4.2%E

***Observations/Insights*** - Texas Instruments down 1% following better than expected earnings and announcement of 1.1K in job cuts; IBM down 2.6% after missing on the bop line. - BHP quarterly output of iron ore flat q/q; Maintains FY production targets, but shares slump over 1% amid decline in the iron ore price. - Australia quarterly CPI tops estimates, with most notable price inflation in food, alcohol/tobacco, and recreation components following recent weakness in AUD. Aussie dollar spikes as investors backtrack from expectations of more RBA policy easing. - Bank of Japan on hold in terms of policy as expected; Keeps overall economic assessment unchanged despite an upgrade from the cabinet office last week; Board member Shirai adds a dissent to risks component, looking for more pressing language on lagging employment/income trends. BOJ also lowers FY14/15 GDP target by a decimal to 1.4%, maintains all CPI targets, but also warns inflation may remain around 1.25% for some time.

***Fixed Income/Commodities/Currencies*** - (CN) China MOF sells 10-yr bonds; avg yield 4.4483% - USD/CNY: (CN) PBoC sets yuan mid point at 6.1087 v 6.1066 prior setting (Weakest setting since Jan 9th) - Goldman Sachs: Sees lower prices in copper and iron ore in 2014; iron ore price to fall to $108/ton in 2014, $80/ton in 2015 - press

- AUD and JPY are the most notable movers among the dollar majors in the FX space, both rising against the greenback following the respective announcements of Australia CPI and BOJ policy statement. AUD/USD spiked up about 80pips to test $0.8870 after the quarterly inflation print vastly reduced expectations for more RBA easing, particularly in the wake of that disappointing employment report last week. AUD/NZD was up 90pips, hitting NZ$1.0660, while AUD/JPY saw a high of ¥92.50 - up 85pips from the lows. USD/JPY pair fell about 30pips below the ¥104 handle after the BOJ statement, where the central bank lowered its forecast for next year's GDP and also noted inflation would remain around 1.25% for some time.

***Speakers/Political/In the Papers*** - (CN) China National Development and Reform Commission (NDRC): Continue to implement prudent monetary policy and proactive fiscal policy - financial press - (CN) China Financial Futures Exchange (CFFEX) currently studying 3% 10-yr govt bond futures - Chinese press - (CN) China may take two years to pass property tax law; Likely to implement more tax trials in 2014 - financial press - (CN) PBoC and CSRC to jointly evaluate China financial market facilities - financial press - (AU) Commsec economist: Today's CPI data likely to bring RBA to a more neutral stance from debating the merits of more easing - Australian press - (AU) According to swaps market data, RBA rate cut probability at its Feb meeting has been reduced to 12% from 17% following Q4 inflation data - financial press - (JP) Japan LDP deputy policy chief Shiozaki: Corporate tax 25% is natural level for consideration

- (US) CEO and Co-Chief Investment Officer Mohamed El-Erian has resigned from PIMCO; To remain at Allianz International Executive Committee

***Equities*** Market Snapshot (as of 04:30 GMT): - Nikkei225 -0.7%, S&P/ASX -0.4%, Kospi -0.1%, Shanghai Composite +1.7%, Hang Seng +0.1%, Mar S&P500 flat at 1,837, Feb gold +0.1% at $1,243, Mar crude oil +1.1% at $95.36/brl

US markets: - SMCI: Reports Q2 $0.35 v $0.26e, R$356.4M v $332Me; +17.0% afterhours - NUAN: Guides Q1 higher $0.23-0.24 v $0.20e; R$487-491M v $484Me; Names new head of ww sales; +8.3% afterhours - HURN: Guides FY13 higher to $2.92-2.96 v $2.68e, R$718-720.5M v $695Me ($2.60-2.72, R$685-700M prior guidance); provides initial FY14 outlook; +4.2% afterhours - CA: Reports Q3 $0.84 v $0.72e, R$1.16B v $1.14Be; Names new head of sales; +3.0% afterhours - CREE: Reports Q2 $0.46 v $0.39e, R$415M v $413Me; +1.9% afterhours - BBRY: Announces Plans to Divest Canadian Real Estate Holdings for over 3M sqf of space; Terms not disclosed; +1.6% afterhours

- TXN: Reports Q4 $0.49 (ex $0.03 charge) v $0.47e, R$3.03B v $2.99Be; To eliminate about 1.1K jobs (about 3% of workforce) BOBE: Guides FY14 EPS lower to $2.20-2.30 v $2.60e (prior guided $2.60-2.65 on Dec 3rd); No longer to provide mid-quarter updates to oulook starting this quarter - conf call; -1.0% afterhours - FE: Guides FY13 $2.95-3.05 v $2.96e ($2.90-3.10 prior), Guides initial FY14 $2.45-2.85 v $2.79e, Cuts quarterly dividend by 34.5% to $0.36 from $0.55 prior; -1.3% afterhours - IBM: Reports Q4 $6.13 v $6.01e, R$27.7B v $28.3Be; Exec: challenges in hardware business persist - conf call; -2.6% afterhours - XLNX: Reports Q3 $0.61 v $0.53e, R$587M v $601Me; -3.6% afterhours - IBKR: Reports Q4 $0.07 v $0.15e, R$262.9M v $317Me; -4.7% afterhours - AMD: Reports Q4 $0.06 adj v $0.06e, R$1.59B v $1.54Be; -12.0% afterhours

Notable movers by sector: - Consumer Discretionary: FAW Car 000800.CN +3.9% (FY13 guidance) - Consumer staples: Warrnambool Cheese & Butter WCB.AU +1.3% (update on Saputo's stake in company) - Financials: CITIC Securities 6030.HK +3.9% (prelim FY13 result) - Materials: BHP Billiton BHP.AU -1.0% (Q2 production result); Angang Steel 347.HK +5.2% (FY13 guidance); Jiangsu Yangnong Chemical 600486.CN +6.9% (FY13 guidance) - Technology: Renesas Electronics Corp 6723.JP -5.1% (to reduce workforce) - Energy: China Shenhua Energy 1088.HK +0.9% (2013 sales result); Shanghai Tonva Petrochemical 1103.HK +26.7% (issues positive profit alert) - Industrials: Sany Heavy Equipment International Holdings 600031.CN +3.3%, Zoomlion Heavy Industry Science and Technology 000157.CN +2.6% (Hunan Province on mechanization of agricultural production); Beijing Jiaxun Feihong Electrical 300213.CN +4.9% (special dividend proposal); Dalian Zhiyun Automation 300097.CN +5.8% (FY13 guidance) - Healthcare: Guangzhou Improve Medical Instruments 300030.CN +4.7% (prelim FY13 result)

After Hours Summary: SMCI +16.6%, NUAN +9.1%, CA +2.2%, CREE +1.9%, AMD -9.6%, BBSI -5.4%, BOBE -4.7%, IBM -2.8% following earnings/guidance

After Hours Gainers: Companies trading higher in after hours in reaction to earnings: SMCI +16.6%, NUAN +9.1%, HURN +5.5%, TPLM +3.1%, CA +2.2%, CREE +1.9%, CBU +0.8%, FULT +0.1%

Companies trading higher in after hours in reaction to news: - TWI +5.7% (MHR Fund Management discloses 10.9% active stake in 13D filing; intends to seek to engage in discussions with management), - BBRY +2.4% (announced plans to divest Canadian Real Estate Holdings; will not comment on potential value of a sale), - GTE +2.4% (confirmed significant reserves at the Breana oil field in Peru), - JCS +2.0% (reported on first phase of restructuring plan; said 'cash position of the company has substantially improved'), - TA +1.5% (settled previously disclosed antitrust case), - RNO +1.4% (provided Q4 operational update; Pennyrile production remains on target for mid-2014), - XCO +1.4% (Fairfax Financial Holdings (FRFHF) discloses 6.4% passive stake in 13G filing)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: AMD -9.6%, BBSI -5.4%, BOBE -4.7%, IBKR -4.4%, XLNX -3.6%, IBM -2.8%, FNB -2.7%, MRTN -1.9%, FE -1.2%, WTFC -0.9%, BGC -0.4%, TXN -0.2%

Companies trading lower in after hours in reaction to news: - BBSI -5.4% (reached agreement in principle for a workers' compensation insurance arrangement with ACE Group to provide coverage to BBSI employees in California beginning in the first quarter of 2014), - NKTR -5.3% (filed mixed securities shelf offering), - KERX -3.9% (commenced a $90 mln underwritten public offering of shares of its common stock), - SPLK -1.5% (announced proposed follow-on offering of 6 mln shares of common stock), - GTI -1.2% (provided update and reconfirmed the savings targets on its previously announced global rationalization initiatives; efforts related to supply chain efficiencies are on track, and co continues to expect $100 mln of cash flow improvement), PODD -1.1% (appointed Patrick Ryan as Chief Operating Officer)