(News Bulletin 247) – The German bank went from holding to buying the shares of the railway equipment manufacturer. The establishment considers that the company should both improve its margins and its cash generation.

Alstom is once again leaving the CAC 40. The railway equipment manufacturer left the Parisian index this Monday at 9 a.m., ejected by the Accor hotel group. This downgrade punishes the difficult stock market performance of the designer of the TGV, with a fall of more than 40% over one year and almost 70% over the past three years.

Alstom shares had plunged by almost 38% in one session in the fall after the group announced that it had burned more than a billion euros in cash over the first six months of its staggered financial year. The company is currently considering several ways to strengthen its financial balance sheet. Among the levers envisaged are asset transfers, the issuance of quasi-equity securities via, for example, the opening of the capital of subsidiaries (as Air France-KLM did with the Apollo fund) as well as an increase of capital.

The goal is, through these measures, to reduce its debt by 2 billion euros by 2025 and thus preserve its credit rating, currently located on the last notch of the non-speculative category.

Alstom is due to give more details on May 8, when it publishes its annual results. The group will provide a breakdown of its debt reduction by type of measures. In other words, the size of the capital increase should be known on this date.

As this deadline approaches, Deutsche Bank sent an important message of confidence this Monday, by raising its advice on Alstom shares to “buy” from “hold” previously while maintaining its price target of 17 unchanged. euros. Which grants a potential of almost 40% based on Friday’s closing price.

On the Paris Stock Exchange, this change in recommendation is followed. Alstom shares jumped 9.6% to 13.495 euros.

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The worst is over on cash

The German bank scrutinized the dynamics of the group’s cash generation and working capital requirements. Conclusion: “the worst is now behind the group”, writes Deutsche Bank.

The bank judges that the key parameters on working capital requirements (receivables, deposits, inventories) should stabilize, while cash generation will be driven by revenue growth (Deutsche Bank anticipates annual growth between 5% and 9 % over the next two to three financial years) and the improvement in the adjusted operating margin.

Deutsche Bank estimates that this margin should increase from 5% for the financial year ending in March 2023 to 7.8% for the financial year ending in March 2026.

This improvement will be made possible in particular by the gradual exit of loss-making contracts from the order book, the ramp-up of contracts with an inflation indexation clause, the extraction of synergies resulting from the acquisition of Bombardier Transport (475 million to 500 million euros by the 2025-2026 financial year) as well as savings on overheads. The group announced in November 1,500 job cuts which correspond to 10% of total commercial and administrative functions.

However, for each 50 point (0.5%) improvement in margin, Deutsche Bank calculates that Alstom generates 90 million to 100 million more cash flows.

Ultimately, the German bank estimates that Alstom should burn 640 million euros of cash over the entire 2023-2024 financial year (after burning 1.12 billion in the first half). But cash generation would return to green from 2024-2025 (461 million euros) before approaching one billion euros (927 million euros) in 2025-2026, according to its forecasts.

A ‘short squeeze’ in May

The establishment across the Rhine also expects that the May meeting will give rise to a “short squeeze”, that is to say a sudden upward movement in the stock, because investors who short-sold Alstom shares would be forced to unwind their positions by massively purchasing the stock.

Deutsche Bank estimates that Alstom should retain the upper limit of its disposal target, currently planned between 500 million and 1 billion euros. The quasi-equity measure would raise 500 million euros, for example via perpetual bond issues from subsidiaries (for example one focused on services), explains Deutsche Bank.

The German bank ultimately expects that the capital increase will only amount to 500 million euros, which, according to its calculations, would imply a dilution of 30% of earnings per share, while the stock price (at the close of Friday evening) implied a stronger dilution of more than 50%.

“If successful, the debt reduction program should help the group reduce its net debt to zero by March 2026,” explains Deutsche Bank. “This program is the first step in the process of ‘normalization’ of Alstom as an investable stock for many investors,” continues the establishment.

Last point mentioned by Deutsche Bank: governance. The former general manager of Safran, Philippe Petitcolin, is to become chairman of the board of directors after the general meeting next June. He will meet Bernard Delpit, financial director of Alstom, and former financial director of Safran under the era of Philippe Petitcolin. The German establishment welcomes “better governance with a significant focus on cash”, noting that Bernard Delpit has already put in place measures to improve cash management.