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May 7, 2013 2:01 pm
Smiley emoticons outnumbered glum ones in Alstom’s presentation of prospects for its businesses, from hydro projects to rolling stock, on Tuesday. Not on the stock market. There, Alstom shares dropped 10 per cent as the French group released full-year figures to the end of March and revised its forecasts.
Here is the market’s conundrum. Orders piled up nicely last year, up 10 per cent versus 2011-12, giving a book-to-bill ratio of 1.2 and lifting Alstom’s backlog by 7 per cent. But 2012-13 sales disappointed (up just 2 per cent) and, in spite of the swelling order book, Alstom cut its revenue growth outlook to “low single-digit” (down from over 5 per cent previously). Operating margin improvement – to 8 per cent compared with slightly more than 7 per cent at present – is also pushed back from 2015 to 2016 or 2017.
According to chief executive Patrick Kron this reflects a rather subtle downgrading of prospects, as weaker economic trends combine with a range of project hiccups – a Brazilian strike here, an Indian land issue there. To offset sales weakness – noticeably, last year, on the grid and renewables fronts – Alstom is stepping up restructuring. Charges for this will again be in the €100m-€150m range this year. But operating margins should be held at about 2012-13’s 7.2 per cent as a result.
The question for investors is whether this is a case of promises deferred or whether if it reflects more fundamental problems, such as weak market positioning and emerging market competition. There is comfort in €400m of free cash flow last year – positive for the first time in three years. But, although the shares surged earlier this year, they now trade on less than 9 times forward earnings, or a 4-5 multiple-point discount to the Stoxx Industrial Goods index. Given the uncertainties, that gap may not close quickly.
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