Astaldi : De-risking has started but still has some way to go

We raise our Credit Opinion to Stable (vs. Negative) based on our de-leveraging expectation from 5.1x to 4.4x in 2017, which will be supported by divestments (we assume EUR 137m of proceeds in 2017, of which EUR 117m in 1H17) and the deconsolidation of EUR 100m of debt. In addition, Astaldi will benefit from lower FCF consumption (our forecast is EUR -68m vs. EUR -297m in 2016) thanks to reduced capex (EUR 110m vs. EUR 196m in 2016 on lower equity investments) and smaller working capital absorption. A material de-leveraging could occur from 2018 onwards if Astaldi succeeds in selling its Turkish concession assets, which is far from being granted given the local political context. - We affirm our Reduce recommendation on the 2019 convertible bond (Ytm of 2.8%) and the 2020 straight bond (Ytc of 2.0%, z+224 bp). Their yields are unattractive, taking into account their rating (B3/B), the still negative FCF generation and the weak liquidity. They compare unfavourably with other B rated bonds in the Euro HY construction universe (Ytw of 14% for Aldesa 2021 notes, Ytw of 8.6% for CMC 2021 notes) as well as bonds outside the sector (average Ytw of 4.0%). - >Support factors - • Good track record of positive revenue growth since 2012 (between +2.6% and +7.6% per annum).• High construction EBITDA margin compared with peers (9.7% in 2016 vs. 9.2% for Salini Impregilo and -1.6% for OHL excluding one-off provisions).• Solid backlog of EUR 19.5bn at end-2016 (EUR 10.0bn in construction and EUR 9.5bn in concessions). The construction backlog represents c. 3.5x LTM sales and provides good visibility.• The asset rotation should support debt reduction. Astaldi plans EUR 750m of disposals over the 2016-21 period, i.e. EUR 450m by 2018 plus EUR 300m by 2021. EUR 227m of divestments (EUR 110m in 2016 and EUR 117m in 2017) have already been agreed.Points to watch - • The construction business is cyclical and depends on macroeconomic conditions. Astaldi was hit by lower infrastructure spending in Italy (domestic revenues fell by -25% in 2015 and by -3% in 2016), although this impact was offset by solid growth in international markets (+18% in 2015 and +6% in 2016).• Astaldi may be exposed to cost overruns. We note that Astaldi recently managed to renegotiate the Muskrat Falls contract in Canada, thereby avoiding significant losses.• Elevated country risk in markets such as Russia (Ba1/BB+ pos, 11% of 2016 sales) and Turkey (Ba1/BB+, 21% of sales). Astaldi holds equity stakes in large concession assets in Turkey, whose disposal may be delayed by the local context.• FCF burn owing to WC needs and concession investments. FCF consumption reached EUR -297m in 2016. We forecast an improvement to EUR -68m in 2017e.• Liquidity depends on the renewal of short-term credit lines (€ 501m of bank debt expires in 2017).