Special Situations: Alstom (ALO FP)
Asset disposals more important than results – BUY OPPORTUNITY
ALO FP: 24.00; Short-term initial target; Eur 26.00 January 21, 2014 Alstom reported 3Q FY2013/2014 results. The key take-away for us is the change in margin and cash flow guidance vis-à-vis the previous guidance. As per the latest guidance, ALO expects (i) the operating margins to decline "slightly" for the 2014/2015 period from the current level of ~7.0%. Previously (as of Nov 2013), ALO was guiding for a gradual increase in operating margins to 8% over the next two or three years. (ii) Negative cash flow for 2013/2014 period vs a previous positive expectation.
Certainly, the lowered guidance on operating margins is negative for the stock. The latest guidance suggests that the targeted margin recovery to 8.0% is pushed back further past 2016. We believe that this development is likely to force ALO management to push for more aggressive cost saving/restructuring measures to improve margins. In our previous report, we suggested that ALO’s cost cutting targets were not as aggressive as Siemen’s targets, hence room for a more aggressive stance. Also, a pickup in sector activity in Europe is likely to benefit ALO share price disproportionately vis-à-vis its peers. Hence, we believe that substantial downside risk to margins is limited.
On a balance sheet perspective, we note that ALO continues to target non-core asset sales, which according to the management is generating substantial interest from potential buyers. ALO is planning to generate €1Bn to €2Bn via asset sales and the management seems very optimistic (in today’s conference call) in achieving this target. Hence, guidance on negative cash flow does not worry us as we believe that the above asset sales should support the balance sheet flexibility of the group.
On a relative valuation basis, ALO seems fairly valued given the current estimates in its sector. ALO is also cheap vs SIE. ABBN seems to be slightly undervalued vs. ALO and SIE. Despite the fair valuations for ALO, we believe that upside to the share price could come in the form of higher than expected cost savings, aggressive non-core asset sales and pick-up in order activity. Hence, we set a short term price target of €26. This could increase north of €30, if the margin recovery picks up. On the other hand, we believe that downside from the current share price is limited. On this basis, we would remain buyers of ALO at current price levels. Risk Adjusted Efficient Price The table below shows our "efficient" price estimate for ALO. We estimate a target price of €25.9 assuming three scenarios:
· Bull Case estimates a target price (using our relative valuation model) of €28.5 assuming ALO achieves its stated OP Margin target of 8.0%.
· Base Case estimates a target price of €24.7 assuming that ALO experiences a slight improvement in OP Margin from 7.0% to 7.30%.
· Bear Case estimates a target price of €21.5 assuming that ALO OP margin drops to 6.5%.
Risk Adjusted Price.€ [cid:image003.jpg@01CF16C8.228ED510]
In other words, the correction brought about by the disappointing numbers is excessive in our view. We expect the stock to settle toward Eur 26 in order to be efficiently priced within the sector, and we recommend buying the stock in order to realize the valuation arbitrage. FULL REPORT ATTACHED
