Alstom starts to repair its financial train wreck
Before investors give the French group much more credit, they will want to see evidence that it can avoid nasty shocks
Companies that announce rights issues rarely see their stock prices rise. Alstom, maker of French TGV trains, is an exception. Its plan to raise €1bn of equity, coupled with disposals and a hybrid bond, has investors hopeful that it can find enough new money to repair its financial crash. A sense of relief is understandable. But for the next leg of Alstom’s journey to begin, it will have to prove that its operations are truly back on track.
It is not hard to see why short sellers had been circling the stock. Suppliers involved in costly long-term projects need an investment grade rating: no customer wants to sign a contract with a company that might not be around when delivery time comes. Alstom, however, was at risk of falling to junk after its shock €1bn cash hit in the first half of last year, in part related to problematic UK contracts inherited from its acquisition of Bombardier.
The outcome was an unsustainable €3bn of net debt, as of March 2024, equivalent to 3 times ebit. The proposed rights issue, underwritten by major shareholders and a bank consortium, plus a €750mn hybrid bond and €700mn of executed disposals, will cut debt to €1bn. A further €1.5bn of forecast free cash flow over the next three years will finally bring its balance sheet to a place of safety.
That would leave Alstom decently positioned to make inroads in what remains a complex sector. True, rail traffic should grow as carbon-conscious travellers switch to greener trains, and consolidation among suppliers has improved the competitive landscape. But customers are large, quasi-governmental organisations with a lot of negotiating power. Margins are tight, and the timing of orders and deliveries frequently slips. The UK’s huge Aventra rolling stock programme is but one example.
Alstom has scale on its side. As it runs off unappetising legacy contracts, it should be able to sign new ones on better terms. That would leave it positioned to make some €1.2bn of ebit this year, putting it on a forward multiple of around 7 times post-disposal enterprise value. Stadler, a much smaller Swiss competitor, is on 13 times, suggesting a chunky potential upside to the current share price.
For contractors, however, the proof of the pudding is in the cash flow. Before investors give Alstom much more credit, they will want to see evidence that the group can avoid nasty shocks. The gravy train is a way off yet.