Time for a stop at the station – rec to Neutral
* Fair value at EUR 29 – fundamentals solid but look for more detail on strategy
We downgrade Alstom to Neutral from Buy with a PT of EUR 29. We continue to view
the fundamentals in the rail market as solid, at least relative to the general industrial
peer group. Alstom should be able to drive low to mid-single digit organic revenue
growth in coming quarters and on the back of that it should have above average scope
to lift margins. However, with the lack of margin progression in 1H16 and little visibility
into 2H16 and onwards, we do not think it is warranted to push the valuation higher at
this stage. Similarly we think there is scope for management to spell out its strategy for
the company in more detail (growth vs. profitability, M&A vs. organic, cost opportunity,
etc.).
* Incorporating GE Signalling, JV income and the cash distribution
We make various changes to the model, including adding GE Signalling, the JV income
(EUR 166m) and the impact from the coming cash distribution (EUR 3.2bn). Small
underlying downgrades and a lower assumed profitability in GE Signalling lead to take
down the PT to EUR 29 from EUR 30. We assume that GE signalling comes in at 8%
margins and revenues of EUR 364m. At our PT the stock trades on 11.4x and 10x
calendar 2016e and 2017e EBITA post restructuring, respectively. Our 2017e income
from ops and order estimates are 2% and 8% below consensus, respectively.
* GE Signalling offsets underlying downgrade
Our income from operations are EUR 374 (-1%), EUR 414 (+5%) and EUR 422 (+5%)
for fiscal 2016, 2017 and 2018, respectively. The inclusion of GE Signalling masks a low
single digit downgrade. We forecast margins from income from operations to be 5.5%
for FY16 (big 2H uptick) and stable at 5.7% for FY17 and FY18. The order backlog
should enable Alstom to grow revenues by 2-4% LFL per year.
* Valuation: PT 29
Our price target multiple is circa 10x 2017e EBITA, about 10% above what we think is
fair for an average industrial business in Europe. We justify the higher multiple because
of the better than average near-term opportunities to lift margins and create value
through M&A.