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We incorporate additional data following the publishing of the Universal Registration document. We do not consider the changes to be material; our rating is unchanged.
Vallourec Vallourec SA
With key aspects of the ''New Vallourec Plan'' substantially de-risked, the NAM pricing headwind clearing and International end-market demand set for multi-year recovery, we believe the market has underappreciated VK''s turnaround and resulting cash returns potential. Key aspects of New VK Plan de-risked, paving the way for re-initiation of cash returns With the exit of loss-making operations in Germany imminent, completion of the global cost reduction program and transfer of OandG volumes to Brazil in the final stages, the key elements of VK''s structural cost reduction program have been substantially de-risked. Freeing up EUR250m in run-rate FCF should enable rapid deleveraging and a further credit rating upgrade in 2024, allowing VK to further reduce its expensive debt burden. By 2025, we see the company re-initiating sector leading cash returns to shareholders for the first time since 2015 as it emerges to more closely resemble its higher-quality primary peer, Tenaris. Tailwinds from favourable International end-market demand, while NAM headwind clearing Higher multi-year capex programs driven by NOCs in the Middle East and LATAM should continue to favour VK''s higher international OCTG sales mix vs peers with order book pricing continuing to improve. In NAM the pricing headwind is clearing, with moderate increases in drilling activity into 2024 expected, distributor inventories normalised and imports drying up. Upgrade to Outperform, EUR20/sh TP With the shares trading near trough valuation levels on 3.8x ''24E EV/EBITDA despite structural change in its earnings potential and significant deleveraging to near zero net debt by 2025 on our estimates, we upgrade to Outperform and raise our target price to EUR20/sh (from EUR15.5). On our 2025 estimates and TP the shares trade on 4.3x EV/EBITDA vs Tenaris on 4.5x.
Vallourec released a very encouraging set of results for Q323. All the lights are green with improving profitability, lower-than-expected net debt and a sound outlook. The group upgraded its guidance for Q4. Although these good Q3 results had been expected (albeit to a lesser extent), this is good news and shows that the investment case is still valid.
There was no major surprise in the group’s presentation, which is no wonder in a CMD. The group reiterated its FY23 guidance and gave slightly more detail to its longer-term targets. We remain confident in the ability of the group to catch-up, at least partly, with peer Tenaris. The current momentum is positive and new energy markets will help further in the near future.
After a stellar 1H23, pricing headwinds in the US and higher losses in Germany in 2H are set to weigh. Focus turns to the CMD on September 12th for greater clarity on the medium-term outlook. 2Q results robust but crosswinds from here VK''s core tubes business benefited from robust pricing in the US and improving momentum in International in 2Q, with EBITDA/t almost tripling y/y. Normalisation of US OCTG pricing and lower cost absorption in Germany as facilities are shut down will lead to a sharp slowdown in run-rate profitability, with nearly 70% of midpoint FY23 guidance achieved in 1H. Much depends on the pace and level to which US activity and pricing normalises, with encouraging signs of supply rationalisation leaving room for optimism. Against this uncertainty, International OCTG demand and pricing looks set to remain firm. Trading on c3.5x ''24 EV/EBITDA and c15% FCFy, the shares appear cheap vs the sector, though to catalyse outperformance management will need to convince on normalised earnings potential and resilience through the energy transition. We remain Neutral. Eyes turn to the September 12th CMD The upcoming CMD in London could be a major catalyst for the shares. Establishing realistic expectations around the normalised earnings power of the business, the sensitivity of earnings and cash flows through the cycle and a path to closing the margin gap vs its closest peer will be crucial in our view. Balance sheet optimisation, refinancing of the 2026 maturities and views on distributions are also key topics to watch for. Changes to estimates and TP We incorporate 2Q results and the latest management guidance. We increase our FY23 EBITDA forecast by 7% toward the upper end of the guided range, leave 2024 unchanged and increase our FY25 estimate by 8% reflecting a more optimistic view on Tubular demand and pricing particularly in International. We roll our valuation to 2024 and increase our TP by EUR1/sh to EUR15.5.
Vallourec released a sound (albeit expected) set of results for Q2/H1 23. Supported by high prices, the group posted its best operating margin since 2008. Net debt has declined more than expected, obviously another piece of good news. Momentum is slowing down though (in particular in the US), which explains the cap on the share price, even if management expects a bottoming out of the US market after Q3. We will not change our numbers much after this release.
The Q123 results were in line with expectations. The positive free cash was obviously good and will help the group reach its target of lower net debt by the 2023 year-end. The management did not mention a significant slowdown in its markets while the resumption of the mine production in Brazil will further support the results. We do not expect to change our numbers materially.
The FY22 results showed a significant improvement, something which had been widely expected given the health of the group’s markets in terms of volume and (even more) prices. The group is also doing the job in terms of restructuring with its “New Vallourec” plan to boost profitability. Considering what peer Tenaris can achieve, there is room for Vallourec to catch up (at least partly) and further grow margins. Given the encouraging OCTG market environment we remain positive and will fine-tune our numbers.
Vallourec released a decent set of results despite the soft market reaction. The group benefited from the healthy US market, although it is less exposed to the latter than peer Tenaris. The tone is quite positive going forward, in particular on the price front. A further recovery in EAMEA markets (and the ramp-up of the Brazilian mine) would definitely support the group’s results. Management confirmed its guidance for FY22. We don’t expect to change our forecasts/target price that much.
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