AOMFF - Alstom: Smart Mobility Investments Could Push The Price Up

Summary

• Alstom is a developer of transport systems with business interests in Europe, North America, South America, Asia, and the Middle East.
• With a massive goodwill of $9.3 billion, Alstom appears to be acquiring a significant amount of competitors. More M&A will likely bring further revenue growth, and increase the EBITDA margins.
• The plan announced by the EU with regards to Smart Mobility will likely offer opportunities to Alstom.

Alstom SA ( ALSMY ) will most likely benefit from a lot of public money intended to improve smart mobility in cities. ALSMY provided beneficial guidance for the years 2023 and 2024, and announced several large projects that may benefit future sales growth. I did my own several discounted cash flow models. My results indicated that there is significant upside potential from successful acquisitions and sale of competitors and divisions.

Alstom

Headquartered in France, Alstom is a developer of transport systems with business interests in Europe, North America, South America, Asia, and the Middle East.

In my view, Alstom is quite an appealing business right now because it increased its exposure to North America thanks to recent acquisitions. Further internationalization of the business will likely offer more visibility, and may enhance stock demand.

The most recent quarterly report was quite beneficial. Service orders improved significantly, backlog increased to up to €83.4 billion, and Europe and APAC continued to fuel growth. With these numbers in mind, I believe that it is an exciting time to review the company's future financial forecasts.

In my opinion, the most relevant slide delivered recently is shown below. The company's mid-term targets included 5% sales growth, aEBIT margin close to 8%-10%, and growing free cash flow. For the years 2022 and 2023, the company didn't assume further inflation, geopolitical crisis, or supply chain shortages.

Balance Sheet

As of March 31, 2022, Alstom reported $30 billion in total assets and $810 million in cash. With a massive goodwill of $9.3 billion, Alstom appears to be acquiring a significant amount of competitors. More M&A will likely bring further revenue growth, and increase the EBITDA margins.

With non-current borrowings worth $2.6 billion and lease obligations of $566 million, I believe that the total amount of debt is not small. In my view, Alstom may have to convince bankers in order to make new large acquisitions.

Financial Analysts Expect Growing EBITDA Margin, Growing FCF/Sales Margin, And Increases In Capital Expenditure

I believe that readers will do good by reviewing the work of other analysts because their expectations are quite beneficial. They expect a median sales growth around 6.3%, a median EBITDA margin of 10.4%, and growing net income until 2025.

I also observed that Alstom expects growing capital expenditures. However, with a decline in the changes in working capital, the free cash flow is expected to trend north.

Increase In The Population In Cities And New Public Investments Would Imply A Valuation Of $2.1

Alstom is expecting an increase in demand driven by increase in population in cities and increase in dense urbanized metropolitan regions. Under this context, public transportation will most likely be supported, consequently Alstom may receive more contracts, and FCF may trend north.

Demographic growth and changes in lifestyles will push demand for rail transport. In industrialised countries and dense urbanised metropolitan regions, rail transit will play a strong role, preventing traffic congestion and space occupancy in cities and urban areas, while offering mass transit solutions, safe, reliable and clean. This is and will continue to be supported by active promotion of public transportation by most countries. Source: Annual Report

The plan announced by the EU with regards to Smart Mobility will likely offer opportunities to Alstom. Keep in mind that the company's transportation systems are significantly more sustainable than using cars, planes, or motorcycles. The company discussed this plan in the annual report.

The European Commission presented its "Sustainable and Smart Mobility Strategy" which lays the foundation for how the EU transport system can achieve its green and digital transformation and become more resilient to future crises. Source: Annual Report

More in particular, in France, Alstom will most likely receive financing to develop new stations in Paris. In the last annual report, management reported that the new investment is expected to stand at €35 billion:

In France, 200 km of new metro lines and 68 metro stations will be opened by 2030 for a global investment of €35 billion for Grand Paris. This is the most important project in Europe regarding automatic metro. Source: Annual Report

Finally, for this case scenario, I studied the expectations from Alstom. Management believes that the company could deliver sales growth close to 5% and an EBIT margin around 8%-10% thanks to incoming synergies and new projects:

Between 2020/21 (proforma sales of €14 billion) - and 2024/25, Alstom is aiming at sales Compound Annual Growth Rate over 5% supported by strong market momentum and unparalleled €81 billion backlog as of 31 March 2022, securing sales of ca. €35 to 37 billion over the next three years.

The adjusted EBIT margin should reach between 8% and 10% from 2024/25 onwards, benefiting from operational excellence initiatives, the completion of the challenging projects in backlog while synergies are expected to deliver €400 million run rate in 2024/25 and €475 - 500 million annually from 2025/26 onwards. Source: Annual Report

From 2023 to 2033, with sales growth around 5%, 2033 revenue would stay at around $23.3 billion. I also included an EBITDA margin around 11% in 2026, D&A/Sales of 3%, capex/sales of 2.7%, and changes in working capital/sales of 4.9%. Finally, FCF/Sales would be close to 3%, and 2033 free cash flow would be €231 Million.

For the calculation of the exit, I used an EV/ 2033 EBITDA of 9x, which gave a net present value of $6 billion. If we sum the discounted FCF with a discount of 8%, the enterprise value would stand at $10.6 billion. Finally, the equity value would be $7.87 billion, and the fair price may be close to $2.1 per share.

Inflation, Cyber Security Issues, And Tensions For Manufactured Goods Lead To A Valuation Of $0.8 Per Share

Alstom appears to be making significant investments in cyber security, which appears to be a clear risk for the company. Imagine that some day trains stop working because of some hacker. The damage in terms of reputation could be significant. I also believe that the company manages sensitive information about individuals. If they lose data bases, or they get stolen, people may decide to use their cars instead. Management is making a lot of investments to fight against these risks:

Alstom addresses the entire Cyber Security Lifecycle. It can help rail asset owners and operators analyse their risks, understand where their vulnerabilities lie and act appropriately. To answer to cyber threats that are constantly evolving, Alstom has developed a market-leading cybersecurity capability that matches proven IT and OT security expertise with deep product knowledge and deployment experience. Source: Annual Report

With small investments in China, other countries of Asia, America, and Europe, it is very likely that Alstom suffers from a certain political crisis. In the last quarterly presentation, the company noted that it does not expect a geopolitical crisis in 2022-2023. However, I doubt that a new crisis will not emerge from 2024 to 2032. Considering the number of deals that Alstom signs with governments, if politicians decide to stop certain deals with the company, revenue growth would decline:

In China, with 13 joint ventures and eleven wholly foreign-owned enterprises, Alstom currently employs over 11,000 individuals. Source: Annual Report

I am also quite concerned about how inflation could affect the company's financial figures. An eventual increase in the price of raw materials could make the company's projects less profitable, which would lower future free cash flow generation. Salary increases could also lead to a deterioration in the EBITDA margins. The company offered some explanation about detrimental risks coming from inflation in the last annual report:

If it remains high over several quarters, inflation can have multiple impacts on Alstom's business and profitability: price increases in respect of purchases from raw material suppliers or sub-contractors, stress on certain projects that do not have index-based price adjustment clauses, salary increases if a wage-price spiral is triggered, with potential repercussions on the recruitments planned by the Group, an increase in the Alstom's debt burden with respect to variable interest rate short-term debt, which could be further complicated by potential exchange rate risks if central banks do not adopt the same priorities at the same speed. Source: Annual Report

Finally, it is worth noting that tensions between markets all over the world push the price of raw materials down. Alstom could also suffer from price volatility and supply problems. In the worst case scenario, some projects may take longer, which would reduce the revenue growth significantly.

Given the appearance of trade and customs barriers, tensions in markets for certain manufactured goods and the extreme volatility of the prices of raw materials, such as steel, aluminium, stainless steel or copper, there can be no assurance that the corresponding cost fluctuations will be fully reflected in the Group's contract prices. Source: Annual Report

Under this case scenario, I included sales growth of 4.5% from 2025 to 2031 and -15% in 2032. I also used an EBITDA margin of 7.5%-5%, capex/sales of 3.5%, D&A/sales of 3%, and changes in working capital/sales of 5%. The results included FCF/Sales of approximately 1.48% from 2025 to 2031.

Putting everything together, I obtained an enterprise value of $5.7 billion, equity of $3 billion, and a fair price of $0.8 per share. Note that I am assuming a very detrimental EV/EBITDA of 8.95x and a WACC of 8%.

More M&A Operations Could Bring The Fair Price To $2.8 Per Share

Alstom executed a few large transactions. Management is acquiring new targets, but also selling divisions. Under very beneficial circumstances, in my view, Alstom may acquire new targets thanks to new free cash flow generated. Both the revenue and the company's profitability would trend north.

In 2021/22, as part of its commitments to the European Commission in relation to the acquisition of Bombardier Transportation, the Group announced in November 2021 the sale of the Coradia™ Polyvalent platform, the Reichshoffen site and the Talent™ 3 platform to CAF and the transfer of Bombardier Transportation's contribution to the V300 Zefiro™ very high-speed train to Hitachi Rail. Source: Annual Report

With sales growth around 8.5% and 10% from 2029 to 2033, a median EBITDA margin of 7.5%, and median FCF/Sales close to 1.95%, 2030 FCF would be $523 million.

With 2033 EV/EBITDA of 10x and a discount of 5%, the implied equity valuation would stand at $10 billion. Finally, the fair price would be $2.8 per share, and the IRR would be 4.1%.

Conclusion

With many governments announcing new investments to design new smart mobility strategies in cities, Alstom appears very well prepared. In a recent presentation, the company announced beneficial sales growth and growing EBITDA margins. A new project in Paris was announced, and massive investments in Europe will likely enhance future revenue generation. I assessed the company's figures and my own assumptions in my financing model. I believe that sufficient merger, acquisitions, and divestments could push the stock price up to $2.8 per share. Yes, there are risks from inflation and perhaps supply chain issues. However, Alstom looks like a stock to follow carefully.

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