Bolloré : An attractive risk-yield trade-off

Publication date: 21/06/2017 17:40 - Writing Date: 21/06/2017 17:39 - - - - - - - - - Bolloré bonds - - cpon - maturity - outstanding - ASW spd - Z spd - YTM - 4.32 - 25/10/19 - 170 - 100 - 96 - 0.80 - 2.875 - 29/07/2021 - 450 - 151 - 149 - 1.49 - 2.00 - 25/01/2022 - 500 - 159 - 161 - 1.67 - Source: Bloomberg - Equity data - Recommendation: Buy - TP: € 5.00 - Equity analyst: Bruno Hareng - - - - - / - - - - - - The deterioration in 2016 credit metrics is likely to prove short-lived as the group’s balance sheet is set to improve significantly pro forma the ongoing sale of a 59.69% stake in Havas. - We recommend buying the bonds which offer an attractive yield compared with 'BBB-' rated papers and non-rated bonds with an estimated equivalent rating. - >Support factors - - Bolloré boasts strong competitive position in its core markets.- Over the past five weeks, the group reported a solid operating performance with average annual growth of 4% for sales, 17% for EBITDA and 19% for the operating profit. Over the period, EBITDA margin increased from 7.4% in 2012 to 10.1% in 2016. Over a longer time frame (the past 10 years), sales doubled, EBITDA multiplied by a factor of 3.4 and the share price by a factor of 2.5 (vs. +2% growth for the SBF 120 index over the same period).- Credit metrics will improve pro forma the ongoing sale of a 59.69% stake in Havas to Vivendi.- As the European commission approved Bolloré’s proposed consolidation on Vivendi on 25 Avril 2017, the group decided to fully integrate Vivendi in its consolidated statements from 26 April 2017.- At end-2016, the group’s liquidity was highly comfortable with € 1.36bn of cash and equivalents and € 2.28bn of undrawn confirmed credit facilities (€ 1.69bn excl. Havas). Bolloré has a portfolio of listed holdings worth over € 4.5bn at end-2016, of which a 20.7% stake in Vivendi, valued at € 3.6bn, but including the equivalent of € 2.2bn Vivendi shares pledged as collateral for credit facilities to finance its increasing stake in Vivendi.Points to watch - - The electricity storage & solutions operations weigh on the group’s overall profitability given the financing costs associated to their development (operating profit of 1e€ 163m in 2012, 1e€ 119m in 2013, 1e€ 120m in 2014, 1e€ 126m in 2015 and 1e€ 168m in 2016).- Bolloré has been hit by marked depreciation in certain currencies in 2016 (naira in Nigeria 1e24% on average, metical in Mozambique: 1e27%, kwanza in Angola: 1e19% and in pound sterling: 1e10% vs. 2015 following the announcement of the Brexit vote). This was reflected by a 1e€ 252m impact on sales and 1e€ 26m on operating profit. To reduce the forex risk, Bolloré charges a large amount of operating expenses in local currencies and covers its main transactions with currencies other than the euro and the CFA.- Capex is expected to remain high in the coming years to support the group's development in electricity storage activities and in Africa. As part of commitments made to operate concession contracts, Bolloré must invest € 1.7bn over a period of over 25 years.- Political risk is high in Africa though somewhat mitigated by the geographical diversification of the group's footprint (presence in 46 countries), its good knowledge of the region (presence for over 50 years) and the fact that some business heads were recruited locally. Moreover, all the African companies have specific insurance policies which cover political and commercial risks. After the Ebola pandemic in 2014, health risks should also be taken into account. At the time, the three African countries hit by the virus and to which the group has significant exposure (Sierra Léone, Liberia and Guinea) account for just 5% of the Bolloré's African revenues (less than € 120m).