* The new CGG – slimmer, and more focused, with NT liquidity challenges set to be solved
CGG’s somewhat forced evolution has accelerated in recent weeks with its exit from the
commoditised marine seismic market, leaving it focused on higher ‘value-added’ businesses in
Sercel and GGR, and its planned EUR350m rights issue, announced yesterday. Our SotP-based
TP falls to EUR2.8/sh, in-line with the current share price.
* Is EUR350m enough? For the next two years, yes, but leverage remains high
With the market likely to remain weak for at least 2016 and most likely 2017, and risks still on the
downside, we think that it is better that any capital raise seeks to cover cash requirements for
downside scenarios – which we believe CGG has attempted to do with its capital raise. We think
that the EUR350m capital raise, together with existing liquidity, should give the company a buffer
over and above what is needed by restructuring costs (USD270m) and loan maturities (USD70m)
by the end of 2017. However, leverage will remain high and covenants (not yet disclosed) may still
be a concern in the medium-term.
* Cash neutrality the key target, and a possibility: MC discipline still needed
Post the equity raise, we see one of the most important criteria for the company being whether it
can be FCF neutral or better at the trough; this rests on Sercel, GGR and multi-client – these
divisions have to pay the interest and corporate bill. With Sercel likely to struggle until demand
recovers, and GGR a steadier performer, much rests on multi-client performance: pre-funding
needs to be robust. We expect CGG to fall just ~USD65/USD35m short of FCF neutrality in ‘16/’17
ex restructuring and working capital movements.
* Valuation – some longer-term support, but leverage means it’s very sensitive
Given the elevated leverage, any valuation exercise today is very sensitive to assumptions around
longer-term margin/revenue profiles – particularly at Sercel. Our base case DCF is EUR2.8/sh, but
rests on a medium-term recovery at Sercel that will not be evident in the near-future. We like
CGG’s profile post restructuring, but remain concerned over the exploration outlook. Reiterate U/P.