Indebted margin laggard faces severe difficulties as downward cycle starts to bite; we suggest 12
potential remedies to generate upside
- Seismic still in a tough spot; cutting estimates; 2016 targets looking tough
Marine seismic faces headwinds from lower demand and still rising supply – winter looks tough.
These headwinds together with slow demand at Sercel lead us to cut our EBIT estimates by 19-
33% for ‘14E-‘16E. We are a long way short of CGG’s 2016 targets (>20% below at the EBIT
level), but find this at least partly priced in. We cut our TP to EUR8.5/sh (from EUR11), set at 9.5x
‘2016E EV/EBIT
- Net debt a risk given earnings sensitivity to slowing end market
CGG is in the midst of its third strategic phase, focusing on improving margins in its Acquisition
division by retiring vessels and reducing its land seismic activity. However, net debt is too high
given earnings volatility and increasing sector headwinds. We estimate a 10% fall in marine pricing
and multi-client sales would put CGG on the edge of its covenant threshold of 3x net debt /
EBITDA.
- We set out 12 recommendations for CGG to go further
Our suggestions range from compensation, specific ideas for business lines and altering the high
risk financial structure. In particular, we think the multi-client business can do better. We also
question whether restructuring of the Acquisition division is ambitious enough – once we adjust for
accounting factors, we still find that CGG’s targets leave its underlying margins >10% below
smaller peers such as Polarcus and Dolphin.
- The reward
Even a partial closing of performance gaps vs peers could add >USD150m to EBITDA and
>USD100m to EBIT, we estimate. Using a historic EBITA multiple of 9.5x, an additional USD100m
of EBIT represents EUR4 per share.