French railway equipment and signaling systems manufacturer Alstom (ALO) has warned markets that it will not meet its annual free cash flow target.
The stock was heavily punihsed in trading on Thursday, losing nearly 36% on the Paris Stock Exchange at midday.
After market close yesterday, on October 4, the company released preliminary half-year results where it revised its free cash flow objective for the fiscal year ending March 2024. It said the objective is “now expected in a range between -€500 and -€750 million” compared to an initial target to be “strongly positive” at around €300 million.
This deterioration stems from the postponement of orders to the second half of the fiscal year, which reduces advances on orders. However, the company was mainly hit by a too rapid increase in inventories in anticipation of an acceleration in production ramp-ups, as well as the difficulties of the “Aventra” program in the United Kingdom, which is experiencing payment delays.
A press release confirms the new financial targets for the 2023-24 fiscal year.
This is the second time the group has negatively surprised the market in terms of cash generation after releasing disappointing financial guidance earlier this year.
Several brokers expressed the annoyance of investors who thought that the group’s difficulties, linked in part to the difficult integration of the railway activity of Canadian group Bombardier, were now over.
In a note to investors, James Moore, analyst at Redburn Atlantic, reflects the general sentiment. He writes: “Following Alstom’s unexpected and frustrating pre-release, with 2Q24 orders and 1H24 Free Cash Flow (FCF) 15% and a billion worse than consensus, we have (1) cut our Earnings Per Share (EPS) and FCF forecasts, (2) cut our DCF-based target price from €32/sh to €30/sh, 40% upside, and (3) considered and analysed the demand, margin and FCF outlook, the balance sheet, liquidity and the potential Moody’s response.
“While we expect the shares to suffer, given the share price weakness and arguably temporary nature of the issues, we maintain our buy rating.”
William Mackie at Kepler Cheuvreux notes: “While there is only a small impact on the long-term fundamental value, we expect speculation surrounding the weak balance sheet, higher finance costs and a loss of confidence to spur a disproportionate price move.”
The broker, like others, however, retains a buy rating on the stock since the current depressed share price does price in most of the bad news affecting the company.
On this point, the group’s CFO Bernard Delpit, in the job for the last five months only, asserted that the group would not carry out a capital increase and that its liquidity needs are largely covered.
Yet, the manager, who sought to demonstrate transparency, failed to calm the fears of investors.
Analysts at Deutsche Bank are rather skeptical.
Based on their updated debt forecasts, they estimated in a report that “absent an equity raise, [we believe that] some portfolio decisions will be required to maintain the group's investment grade rating”.
