Investors reacted very negatively on Thursday to Alstom’s announcement of excessive cash burn in the first half of the year. The railway company lost more than a third of its value on the Paris stock exchange despite reassuring statements.
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At 2 p.m., the French manufacturer’s shares fell a whopping 36.6% compared to the previous day’s closing price in a slightly rising market. Almost 3 billion euros wasted for the shareholders.
The cause of this collapse? Alstom, which produces trams and trains in particular, including those for the future TGV, announced on Wednesday evening that its free cash flow would be largely negative during the financial year, in the range of -500 to -750 million euros, although it Investors had previously promised that this indicator would move into “significantly positive” territory.
Free cash flow is a key indicator for assessing the value of a company. It corresponds to the difference between operating capital surplus and investment expenditure. The more negative it is, the more financing the company needs to meet cash flow requirements…
However, the group had to write red numbers in the first half of its staggered financial year (end of September 30), to -1.15 billion euros.
“We are in a strong ramp-up, especially in the rail vehicle sector, which, in addition to the projects taken over from the portfolio that were at the same time in the completion phase, is weighing on the free cash flow of this first half of the year.”, explained CEO Henri Poupart-Lafarge, quoted in Wednesday’s press release.
Half of this negative free cash flow is due to the manufacturer’s production ramp-up, which resulted in a significant increase in inventory levels to avoid disruption to production lines. This should be “fully absorbed in the coming years,” the company says.
Bombardier legacy
About a third is due to the delay in completing the 443-train Aventra program for the UK, which was transferred from Bombardier Transportation’s portfolio acquired from Alstom in early 2021. Completion is now scheduled “at the beginning of the 2024-2025 fiscal year.” which will begin on April 1, 2024.
The rest is due to program postponements, which led to a “decrease in the amount of advances received in the first half of the year” when the contract was signed.
In the second half of the year, free cash flow should be positive, between 400 and 650 million euros, said Alstom, which has 3.5 billion euros of liquidity.
However, according to Stifel analysts, this warning will “immediately raise questions about the health of the company’s balance sheet.”
“It is difficult to understand how inventories can increase so massively in the context of improving supply chains,” they said, pointing to the possibility of “major problems.”
While acknowledging that the cash flow gap would “reverse over time,” their colleagues at Oddo BHF pointed to a “big” warning that was “not the first” and that they believe “ “Fears” of a downgrade of the company’s rating are being “resurrected” by the Moody’s agency.
The group’s finance director tried to allay those fears, telling Bloomberg on Thursday morning that he “completely understands” the disappointment of analysts and investors, acknowledging that Wednesday’s announcement had come as a “shock” to them.
And Bernard Delpit said, according to the agency, that he was open to possible sales in order to improve the group’s financial situation: “If there are good opportunities, I will of course discuss them with the board.”
However, he ruled out raising funds through a capital increase, for example. Such a process is “not on the table,” he assured.
In the first half of the year, the railway manufacturer achieved sales of 8.3 billion euros, an increase of 2.7% (6.5% at constant volume and exchange rates) and generated 8.4 billion euros in new orders (-16.8%).
The group confirmed its further forecasts on Wednesday, in particular the organic growth in sales and operating margin for the entire financial year. The first half results will be published on November 15th.