EUR 850.00 For Business Accounts Only

Morningstar | Alstom Reports Good Sales Growth and Firm Order Intake in 1Q; Phase II Review for Mobility Tie-Up

Alstom reported superb first-quarter sales of EUR 2 billion, up 14% on a reported basis and 17% organically on the year-ago period. Additionally, the firm recorded a thrilling level of orders of EUR 2.6 billion, up 42% from a year earlier, including the contract win for a driverless metro system for Montreal, an order for Citadis trams in France and Germany, and a combined equipment and maintenance contract for metro in Sydney. The record backlog of EUR 35.5 billion at the end of June 2018, up 4% organically year on year and representing more than four years of sales, provides a high level of visibility and supports our view that revenue at the firm can grow at midsingle digits in the medium term, despite strong Asian competition. The sales numbers were slightly above our expectations and mainly powered by deliveries of regional trains in France, progress of the Riyadh metro system in Saudi Arabia, and system projects in the Middle East. We are updating our estimates to reflect the latest developments, which could result in a modest increase (less than 5%) in our fair value estimate, as first-quarter results showed the underlying strength of the business, in our view. We maintain our no-moat rating.

During the quarter, Alstom reinforced its local network in countries with strong growth potential for mobility services, through the acquiring of a 20% stake for EUR 115 million in the Russian TMH Locotech combination. We like this strategy, as Alstom is diversifying operations in order to be less dependent on France and the rest of Europe, and in order to pursue emerging-market growth, a local presence is needed.

As indicated in our September 2017 note, we believe EU regulatory approval represents the biggest potential deal breaker for the creation of the world's second-largest manufacturer of rolling stock company by combining Alstom's assets with Siemens Mobility, given the large European exposure of both companies. More than 60% of the workforce of the combined entity are employed in Europe, and approximately 60% of Alstom’s 2017 revenue was generated in this region. On July 13, the European Commission indicated that a Phase II in-depth investigation has begun, as initial analysis raised concerns about competition in the global high-speed train market and signaling sector. In both segments, the combined entity would have at least three times the market share of its closet competitor. We believe additional review is common and required to assess mergers of companies of this size, and we stick to our 80% probability of deal completion, with the deal closing in first-half 2019.