Fundamental change in companies often takes a long time. When benefits are not immediately obvious, lost in the complexity or require time to be implemented, impatient investors often move on, leaving an opportunity for diligent investors with a longer time horizon. Our investment in France-listed Alstom is one such case where we feel we are on the right track.
In 2014 Alstom started to morph from a global engineering conglomerate when it agreed to sell most of its business to US giant General Electric (GE). The complex deal took until the end of 2015 to complete, but Alstom has now emerged as a completely focused business operating as the leading global provider of rail transport infrastructure, including a century old presence in Australia where it supplies trains, trams and related equipment and services in Victoria, South Australia and New South Wales.
Source: Alstom
The change has made analysis of the new company difficult. The last two financial years accounts have been opaque, reflecting a mix of the results of the old and the new company. Limited management guidance has resulted in a wide range of analyst forecasts of a variable quality. Investor apathy is reflected in a share price which, after initial excitement, has moved sideways for more than two years.
Hidden within the data however is a core business with a well established growth trajectory. Sales have grown for four consecutive years and new orders have grown faster. Orders currently stand at a ten year high and represent over four years of work. Likewise margins have been on an upward path for the last five years.
At a quick first glance, Alstom looks marginally more expensive than its global peers (many of which are conglomerates such as Siemens and Hitachi) on an 9.2x multiple of Enterprise Value to Earnings before Interest, Tax, Depreciation and Amortisation (EV/EBITDA), based on consensus forecasts for 2017/18 as follows.
Source: Bloomberg
However, this ignores the EUR 2.4bn of proceeds from the sale which are still tied up for a few years in joint ventures with GE, but which Alstom has the right to turn into cash over the next year or so. Taking this into account, the company trades on a nearly 50% discount to its conglomerate peers (5.1x vs 9.0x consensus 2017/18 EBITDA).
Source: Team analysis, Bloomberg
Adjusting for this, and applying the EV/EBITDA multiple of the conglomerate peer group suggests that Alstom could be worth in the region of EUR 35, compared to around EUR 24 at time of writing. However, if Alstom is compared to the purest play rail company in the group, Canadian company Bombardier, Alstom could be worth another EUR 10 per share!
Alstom is subject to risks such as the global economic cycle, the complexity of governments and public bodies as clients, and operates in emerging markets. However this is true of its competitors as well and we believe such risks are more than discounted by the current market valuation.
Positive attributes include a strong balance sheet, a global market leading position, growing annuity-like service revenues, a strong order book and the currently attractive operating momentum it faces. We expect management to monetise the GE joint ventures and buy back shares and raise dividends, while still having money to continue funding growth via bolt-on acquisitions.
Alstom also fits another of our current themes: expectation of a global wave of infrastructure focused fiscal expansion. Not only is there growing policy maker recognition of the limits to the efficacy of monetary policy but there is a real need for this spending.
In many mature economies, years of investment neglect has resulted in crumbling transport infrastructure. Any visitor to New York will observe the pot-holed roads but the rail infrastructure is no better. In growing economies such as India and South Africa, investment in transport networks is required to replace the old services but also to facilitate the movement of a growing population.
Alstom is well positioned to serve the major geographical markets with significant ongoing investments in manufacturing plants on all continents. Indeed, recent contract wins include its largest ever: manufacturing and servicing a fleet of passenger trains in South Africa; similar contracts in India in both passenger and freight; and fast passenger trains in Europe and the US. And let’s not forget the Sydney CBD light rail project.
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