|Shares Out. (in M):||222||P/E||29.34||20.30|
|Market Cap (in $M):||8,973||P/FCF||20.18||17.54|
|Net Debt (in $M):||501||EBIT||487||575|
We believe that the merger will make it through the lengthy antitrust review process with minor remedies, largely because of the small (< 20%) share of the combined entity in the global rail supply market, as well as the significant competitiveness of a number of well-capitalized competitors in areas where there is more market concentration (companies such as Bombardier, Hitachi and Stadler). We also believe that this merger is truly transformative, giving Alstom a broader geographic footprint, a better business mix weighted more heavily towards the higher margin signaling and services businesses, and a diversified 4 year backlog that will provide very strong visibility. Furthermore, post deal the company will be in a net cash position of over € 500 million, which will provide the company will significant balance sheet optionality. For all these reasons, we believe Alstom should trade at least at a peer multiple EV/EBITA (PF FY18E) of 11.0X, which equates to a pre-dividend share price of € 45 per share for 29% upside.
Siemens Alstom pro forma for the merger trades at a FY18E EV/EBITA of 9.2X if you include just € 150 million of synergies (out of the € 470 million expected by year 4 post deal). We think these synergies are quite attainable and the margin enhancement beyond FY18 is likely underestimated by the Street. As such we think the stock should at a minimum trade at the MSCI Europe Capital Goods sector average of 11.0X. With EBITA of € 1.52 billion, net cash offset by unfunded pension and other off balance sheet liabilities, and 452 million shares outstanding, this equates to a post-dividend fair value of € 37 per share and pre-dividend fair value of € 45 per share, for upside of about 29%.
|Alstom (ALO FP) Valuation Pro Forma|
|Price per shareSi||34.91|
|Shares Outstanding, fully diluted (mm)||452|
|Equity market cap (€ mm)||15,779|
|Less special dividends (€ mm)||-1,800|
|Less net cash after exercise of GE puts (€ mm)||-700|
|Plus unfunded pension, other off B/S liabs||700|
|Enterprise Value (€ mm)||13,979|
|FY18E PF Revenue||16,700|
|FY18E PF EBITA pre-synergies||1,370|
|FY18E PF EBITA margin pre-synergies||8.2%|
|FY18E PF EBITA post-synergies (discounted)||1,520|
|FY18E PF EBITA margin pre-synergies||9.1%|
|EV/EBITA (FY18E pre-synergies)||10.2X|
|EV/EBITA (FY18E post-synergies)||9.2X|
|Subject||Thanks for the idea|
|Entry||11/06/2017 12:07 PM|
Thanks for the note. I was wondering if you could discuss the current operating environment. What are the top line levers? It this a business that primarily wins tenders through RFPs? Is there a maintenance/replacement part of the business? How big is the signalling business vs the rolling stock?
|Subject||Re: Thanks for the idea|
|Entry||11/07/2017 12:59 PM|
Sorry for the delay. So in terms of mix, based on 2017 annuals, Alstom had 43% rolling stock, 19% signaling, 20% service and 18% turnkey/systems exposure. Siemens had 41% rolling stock, 38% signaling, 13% service and 9% turnkey/systems. These were similar sized in total (Alstom has € 7.3B, Siemens has € 8.0B) and the pro forma combined mix becomes 42% rolling stock, 29% signaling, 16% service and 13% turnkey/systems. Alstom's EBIT margins by division: 2.4% rolling stock, 8.5% signaling, 10.4% services, 5.7% systems, overall 5.8%. This was expected by the Street on a standalone basis to improve to the following by FY20: 4.0% rolling stock, 9.6% signaling, 11.6% services, 6.6% systems, overall 7.0%. While we don't know the EBIT margins by division at Siemens but anecdotally, I want to say they are about as follows: 6% rolling stock, 10% signaling, 11% service, 8% systems - if I plug those into their mix I get 8.3% which I think is roughly where they were in 2017 (there's a fudge factor given that we're pulling these divisions out of mother Siemens of course). If I then combine both operations I get EBIT margins of 4.2% for rolling stock, 9.5% for signaling, 10.6% for service and 6.5% for turnkey/systems, 7.1% overall. If I assume margin improvement for Alstom to that 7.0% level, and a slightly less ambitious trajectory for Siemens, I get the following EBIT margins for pro forma combined (2020 targets): 5.5% rolling stock, 10.6% signaling, 11.3% service, 6.9% systems, 8.1% overall. If I then layer on on € 470 million in synergies across the board we then get margins of 11.1%. Interestingly the Street almost universally tossed out Siemens' longer term (2022) target of at least 11% as too rosy. In reality, if you believe synergies are attainable and you simply roll forward consensus margin expectations for both companies, this is not rosy at all.
In terms of top line levers, this is as you suspected, primarily there are RFPs - each country has a different process where some go automatically to national champions, others are more competitive bid processes. Alstom has been on fire with orders - FY17 was the third year in a row with orders above € 10 billion (book/bill of 1.4X). For example this year they won the large Amtrak high speed rail (€1.8 billion), the Dubai Metro (€ 1.3 billion) and several mid-sized orders in Europe. FY18 probably will be a bit lighter on the order front because of the timing of large contracts and deferall of contract awards in the Middle East. Demand in Asia, particularly India, is very strong. Latin America is still plagued by weakness in Brazil, although Argentina appears to be picking up. Urban rail projects are picking up in the US and Canada, though there are some questions around Federal funding in the US post elections (Trump...). In France there should be a good pipeline with the next generation of very high speed trains coming. Germany is also a bright spot, and Siemens is well situated there.
As for the maintenance/replacement part, as you can imagine there is a significant component across a few divisions, but the companies are coy in giving a breakdown. Alstom has said they are looking to get closer to non-rail service companies moving into rail operations, like Serco in the UK, with Alstom providing maintenance and technical support on network and traffic management. Siemens is likely more advanced there given its position in road management solutions. In rolling stock, one of the reasons why Alstom has so much lower margins than Siemens is that Alstom focuses on low volume, custom-made products that have a lower service component, while Siemens is more focused on modular, platform-based trains that have a higher service component.
One thing Alstom has talked about in conference calls and conferences is their effort in digital technologies. They launched something called HealthHub which is a way to make a complete digital diagnosis of trains that attempts to implement predictive maintenance - they had been using this internally for their own maintenance contracts but are now starting to sell it to customers. They also have launched something for passenger trains called the Optimet Orbanmap, which is an intelligent metro map that gives real-time information on traffic, wait times, showing which cars are empty, etc. There's also a multimodal supervision solution which is a system that serves as an overlay for all single systems (all control centers for the metro, cars, bikes, buses) - it allows the public transportation authority to manage in real time the complete mobility of their cities. Obviously all of these digital technologies could be very margin enhancing...