Alstom - on right track and cheap compared to likes of ABB, Schneider, GE and Siemens?

This major capital equipment manufacturer looks good value relative to peers and ticks a lot of the right environmental boxes. With a robust balance sheet they offer excellent visibility with a backlog stretching out 25 months. Alstom could also be a big beneficiary of the weak euro, although this may take longer to play out. 

THE BUSINESS

Alstom is a major capital equipment manufacturer and turnkey project manager specializing in the manufacture and supply of transport and energy infrastructure. The Group designs, supply and maintain a range of high technology products used for power generation sector and industrial markets, including turbines, alternators and boilers. They also produce hydroelectric equipment, combined-cycle power plants and environmental control systems. In addition, Alstom SA supplies equipment and infrastructure for the rail transport sector, notably rolling stock, signaling and maintenance systems, locomotives and high-speed tilting trains, among others.

BUSINESS SEGMENT/ DIVISIONAL BREAKDOWN

Power (71% sales)

•         Turnkey power contractor delivering everything from whole power stations to transmission projects. Biggest strengths are in combined cycle gas plant (gas turbines), coal (steam turbines) and in boilers. Turbine technology transfers to other markets like Nuclear, hydroelectric and wind power – making quite a diversified offering. 10% of the business is renewable technology. Return on sales 10.6% (9.6%)  European exposure 43%. Finishing integration of Areva Transmission & distribution business in conjunction with Schneider. This will expand transmission business. Orders recovering in H2, but down c.40% in all 3 areas: renewable, thermal services & thermal systems.

Transport (29%)

•         Manufacturer of locomotives and carriages for intercity, metro, tramways (65%) and signaling (20%) and infrastructure and services (15%). ROS 7.2% (7.0%), 68% Europe. Demand remains better than Power. Orders down 30% in year but stabilized. Strategic partnership set up in Russia to open large new potential market Geographic breakdown (by order intake). 62% Europe, 13% Asia, 45% Africa, 7% S. America, 13% N.America.

PEER GROUP

• ABB (NYSE:ABB) @SF18.98  PE Dec 2011 13.6x  Mkt cap SF43bn
• Schneider (EPA:SU) @€82        PE Dec 2011 12x Mkt cap €22bn
• Siemens (ETR:SIE) @€74        PE Sept 2011 12.1x Mkt cap €64bn
• GE (NYSE:GE) @$14        PE Dec 2011 10.9x Mkt cap $154bn

SOME TRADE THOUGHTS

•         Cheap (PER 9.6x March 2011) compared to other Power industry peers (see above).

•         Swings in advances not as big as feared - €1bn decline in advances to €6.4bn, but cash flow neutral due to improved profitability.

•         Book to bill has declined but recovering in H2 and should improve further in 2011

•         Solid results, realistic outlook, but not a lot new when margins will take a step backwards this year.

•         Ticks a number of environmental boxes: Carbon dioxide capture, wind turbines, HEP, Flue gas desulphurization.

•         Bigger emphasis on capex to set up local production.

•         Order intake has recovered a little in H2 (but still down 39% on the year. We are over the worst and the backlog is still very strong €42.6bn – down only 7%.  (Most recent news: ABB Power orders stable in the last 3 quarters)

•         Good visibility with a backlog stretching out 25 months.

•         Optimistic midterm outlook on Power.

•         Record ebit margins of 9.1% have met company’s long term target. Tougher market outlook means Management forecast 7-8% margins in current year. Interestingly this is for 2 years: so maybe not much recovery in 2nd year?

•         Although full year results generally beat expectations it looks like forecasts for Mar 2011 year likely to be the same. Delayed impact of order slowdown means next year will be the first (and only?) year of decline.

•         Financial position appears very sound with €1.8bn net cash at 31st March 2010 (after finance leases).

•         Good track record on earnings in last 5 years. Sales growth of 8% CAGR and Margins have recovered from 5% to 9% this year.

•         Management reports good project execution: Have they remained in control as historically problems in turnkey every 4-5 years?

RED FLAGS           

•         Very European bias (58%) and low Asian exposure (14%) so not so strategically interesting

•         Further workforce downsizing needed to counter cost pressures (especially Asian competition). Achieved in 2010 mainly by natural wastage and reduction in contract labour. Restructuring cost was only €112m (similar to 2009)

•         ABB talks about continued volume & price pressure in Power Products

•         Forecasts more uncertain than peers

•         Net c€6.5bn (€7.4bn) of customer advances therefore cash flow is hence very dependent on order intake.

•         Cashflow negative €0.1bn due to €1bn fall in advances. Not a disaster though and should be positive again in 2011.

•         Realistically there isn’t much more to go for on the margin recovery front.