Funding needs highly challenging in our view - Cut ot Underperform
Abengoa announced last Friday that its FY15 corporate capex budget would rise by a significant
EUR1.3bn (to EUR1.7bn). This is as the group did not manage to secure equity funds from its
partner EIG for its largest construction project in Brazil and also due to the macro woes there. This
raises concerns over the feasibility of Abengoa’s funding model and its ability to generate value for
its existing shareholders. We downgrade to Underperform and cut our TP to EUR1.5.
Capex overshoot and unfavourable deal with EIG
Abengoa’s announcement of a EUR1.3bn corporate capex overshoot last Friday far overshadowed
the rather impressive EUR1.3bn order intake reported in its key Engineering & Construction (E&C)
segment. As a result, 2015 will be the twelfth straight year in which Abengoa has not managed to
generate positive FCF (we estimate corporate FCF of -EUR1.3bn). In addition to the considerable
leeway EIG has to walk away from specific projects such as the Brazilian project, we also note that
Abengoa’s corridor for value creation under its APW-1 agreement with EIG is very limited.
What can Abengoa do next?
Shorter term Abengoa needs to quickly tap its remaining organic liquidity levers. We expect to see:
1) further divestments to Abengoa Yield (management expects EUR0.4bn of additional asset sales
in H2 15); 2) further paring of its c.42% economic interest in Abengoa Yield (worth about EUR1bn);
and 3) the formation of a new “Warehouse” facility (management now expects APW-2 by year-end
vs. in 2016 previously). This may bring temporary relief but to create equity value medium to longer
term, we believe Abengoa needs a longer-lasting solution, such as an issuance of fresh equity.
Downgrading to Underperform, cutting TP to EUR1.5
Abengoa’s much-trumpeted efforts to become an asset-light operation have proved unsuccessful in
the two years since its launch. We downgrade to Underperform (from Neutral) to reflect our
concerns over the group’s growing funding requirements and its value creation potential under its
agreement with EIG. We lower our TP at EUR1.5 (from EUR4), valuing the core E&C segment at
3x EV/EBITDA, in the middle of the range we think the equity market may now apply.
