* Action/Event: Vallourec has announced its plan for a capital hike to raise c €1b partly by selling new shares to fund its restructuring in Europe and Brazil and to acquire an asset in China. Detail of the cap hike given within this report. We cut 2016E EBITDA to E-100m (from E50m) on revised company guidance of –ve EBITDA for the year. 2016E and 2017E EPS are up as we now use diluted number of shares to account for mandatory convertible bonds maturing in 2018.
* Investment Case: We think the revised restructuring looks sensible but delivery is not without material risks. We think the presentation lacked detail on assumptions and timing of cost reductions which is a risk in the light of the failure of the Valens plan announced last year. We think the following questions are important: 1) is €1b of fresh capital enough 2) is the E750m cost reduction plan a) feasible, b) enough c) deliverable fast enough to avoid another capital raise and d) likely to be retained in the p/l or given back to a weaker market. Within the note we perform scenario analyses on earnings, debt and valuation. Without a material market recovery there is risk that there remains no real value in the equity until 2019. A weaker cycle would make even this assumption optimistic. A
material recovery in the cycle could see upside to c E 23 per share by 2020, but this scenario remains very much a play on the oil cycle and rig count and VKFP may not be the safest way to play this upside yet. We maintain our Underperform rating awaiting further clarity of detail of cap hike and cycle.
* Catalysts: Q4 2015 earnings release 18th February.
* Valuation: Valuation is €4/sh as before and remains so until we have new information on the planned capital hike.