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Transformation story is well on track
21 Sep 16
In a call with the company, we received an overview of both the short-and long-term issues which comforted us in our investment case and positive recommendation. The short-term catalyst (12-18 months) definitely and unsurprisingly relies on the strategic plan aimed at deleveraging the company, and restoring margins and ROCE by the end of 2017e. The plan has already begun to bear fruit as seen in H1 16, while 50% remains yet to be accomplished. However, the strong execution so far confers visibility on the targets in our view. The second leg looks mainly cyclical, as the company’s business relies highly on cyclical businesses such as construction, energy and automotive, essentially in Europe. The improvement in these markets is however mainly macro-driven and subject to volatility. The third leg, probably the main and more structural catalyst, relies on growth potential coupled with margin expansion based on the most value-added businesses, especially HV submarine transmission used for interconnections, with strong traction coming from renewables, a trend which looks sustainable in the long run and that will help to achieve the transformation towards a more growth-oriented story.
Strong execution in a challenging environment
29 Jul 16
Nexans reported H1 16 results. Main facts: Revenues came in at €2,951m in H1 16, a 9.8% reported decrease but corresponding to 0.2% organic volume growth. The operating margin reached €135m, corresponding to a 5.9% of sales (versus 4.0% last year), above market expectations. The company is back to net profitability at €30m versus a €58m loss last year. Net debt stood at €373m, down 30% over the last 12 months. The company gave no guidance for FY16 but remains confident in its strategic initiatives to continue to deliver margin improvements.
A slow start to the year as expected
03 May 16
Main facts Organic sales were down by 1.5% to €1,433m (versus €1,601m for Q1 15) but corresponding to 2.4% organic growth compared with Q4 15. •Robust growth in Q1 16 for Automotive harnesses and LAN cables & systems, offsetting the continued deterioration in the oil and mining sectors. •Sales for the submarine high-voltage business were down 14% as expected, due to the effect of project timings. •Start of a recovery in sales of medium- and low-voltage distribution cables to European energy operators (Distribution & Operators division +4.6% yoy organic growth in Q1 16). Management also reported “satisfactory progress for all of the group’s strategic initiatives”.
The recovery is well on track
19 Feb 16
FY15 revenue reached €4.6bn, representing a 1.7% organic decrease mainly reflecting the 15% decrease in North America due to lower investments in Oil&Gas and Mining (c.10% of revenues). The adjusted operating margin was €195m, up 32% yoy and corresponding to a 4.2% margin vs 3.2% last year, slightly above our expectations. The increase in margin was mainly led by Distribution & Installers despite a -2.7% organic change, thanks to prior restructuring actions and sales optimisation. Transmission had the best spot with 2.9% organic growth yoy and also contributed to the margin increase. The Industry BU was about flat in 2015 (-0.4% yoy) but with increased margins as well (4.6% of sales versus 4.1%). However, one-off costs including €129m impairment charges coupled with a €100m restructuring cost led to a net loss of €194m, which was higher than expected. Net debt was down to €201m from €460m due to strong cash flow generation mainly led by lower working capital and despite a cash outflow of €104m for restructuring costs. The company aims to accelerate its transformation in 2016, with an improvement in the return on capital employed, confirmation of the WC reduction and cash flow generation, the management remains confident on the 2017 strategic plan.
Growth still missing: priority to restructuring actions
16 Oct 15
Nexans announced Q3 15 revenues of €1.52bn, at current metal prices (versus €1,574m in Q3 14), down 0.3% yoy on an organic basis. For the F9M 2015, the organic sales decrease came to 0.6%. The following trends by segments were reported: •Sustained robust growth in Q3 for automotive harnesses, LAN cables and systems, and submarine high-voltage projects (excluding umbilicals). •Slight 1.3% decrease in Europe, reflecting lower business volumes in the building market, whereas sales to energy operators and to industry markets stabilised during the period. •Ongoing positive momentum for the Middle East, Russia and Africa area, upturn in South America and stable sales in China. •Continued deterioration in the Oil & Gas and Mining sectors, which weighed on sales in North America and Australia and led to a slowdown in umbilicals projects. Management stated that strategic initiatives, pursued as planned, will continue to have a positive impact on profitability in H2 15.
Margins held firm in H1 despite several headwinds
29 Jul 15
H1 15 sales reached €2,383bn, corresponding to a 0.8% organic decrease, due to a weak Q2 hampered by ongoing difficult market conditions in Brazil and Australia as well as in the Oil & Gas and Mining sector. •.The Industry division reported organic growth of 2.5%. •.The Distributors & Installers division recorded a 4.8% organic sales decrease. • The Transmission, Distribution & Operators division's sales increased by 1%. The operating margin was up 23% year on year to €95m, reflecting the restructuring actions despite a slight organic sales decrease (-0.8%). The operating margin reached 4% in H1 15, a 60bp improvement yoy. The net result was a loss of €59m due to €98m restructuring costs recognised during the quarter. The significant improvement in working capital over the year has led to a reduction in net debt (€531m versus €607m at 30 June 2014), despite cash outflows for restructuring and the European fine (€170m in total). The company did not provide any guidance for 2015 but intends to continue to adapt costs in Brazil and Australia.
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Fighting the waves
25 Oct 16
Management action in response to a tough trading climate and falling profits should contribute to a sound recovery in profits next year. Following share price weakness, the group is valued at a substantial discount to both the broking market leader Clarkson and to other peers. Meanwhile, if the dividend can be held, the shares offer a well above-average yield, pending an eventual improvement in trading conditions.
21 Oct 16
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FY17 expectations unchanged. Interim dividend maintained
25 Oct 16
Interims reflect tough markets which impacted Technical. Shipbroking delivered a resilient result and Logistics has performed well. The interim dividend has been held at 9.0p. The group anticipate an improvement in H2. The Board’s expectations for the year are unchanged based upon the strength of the order book due in H2, its ongoing market coverage and the benefits of action taken previously. We have retained our FY2017 PBT forecast of £8.7m and a maintained dividend. We reiterate our Buy and adjust our TP to 450p.
Doing things differently
25 Oct 16
Growing pains have impacted on its operational performance (EBIT margins 5.8% FY15 vs 12.2% FY13) and the HSS Hire valuation is at distressed levels (price to book 0.4x vs 1.3x at the time of the float). As the top-line catches up with the expanded cost base and the roll-out of the NDEC leads to greater efficiencies, margins and returns will rebound. Historical experience has shown that price to book ratios typically match these improvements (see Ashtead FY08-FY15, price to book expanded +196%). Therefore, we see scope for material upside in the share price as the expected operational recovery to progress. Our 12 month target of 115p equates to a 0.8x price to net operating assets
Risks discounted leaving significant upside
18 Oct 16
FY 2016 sales grew strongly at +22% but EPS growth lagged at +3% (our revised forecast -1%) as staff attrition and significant investment in new services held back profitability. Conversion of profit into cash improved significantly, at 240% in H2, as shorter payment terms and a lower level of extensions also benefited. We make no major changes to our forecasts and reiterate our view that Utilitywise is at the forefront of a changing energy market, supported by investment in innovative technology. The current valuation is entirely focused on the short-term challenges and ignores the growth potential supported by the new services.