CMC di Ravenna : Feedback from credit lunch

We invited Cmc di Ravenna's CEO Roberto Macrì and IR Andrea Pierpaoli to a roadshow in Paris. The discussion focused on three main areas: 1/ prospects in the home market, 2/ international expansion, and 3/ cash generation and net leverage. - >Italy's construction market seen stabilising at a low level - The group still generated 42% of its sales in Italy in 9M 2017 but contribution from this country should gradually decline as it accounts for only 27% of the backlog. Cmc has been very selective in award taking in the past three years amid tight competition (9M 2017 Italian new orders stood at only € 261m, i.e. 16% of the total). That said, competitive intensity could abate, as some rivals are engaged in restructuring efforts (albeit at different stages). Cmc does not expect recovery to take shape before 2019-20 but believes the Italian market has now bottomed out. The upcoming general elections, which are unlikely to give rise to a clear winner and might ultimately lead to a coalition, is not seen a major threat. Momentum still solid overseas across all regions - Overseas expansion has been the group's key focus and the solid momentum seen so far is set to continue, as new contracts worth € 100m to € 200m are slated to be finalised shortly in the US, Europe, Middle East and Africa.While some investors expressed concerns over Africa's weight (31% of sales and 41% of the backlog), Mr Macrì said the foothold had a low risk profile as around 90% of ongoing contracts are secured by multinational organisations. We admit this helps mitigate the non-payment risk and we appreciate the group's overall good track record in the region. However, we also note the risk linked to currency headwinds (for contracts denominated in local currencies) and payment delays. In the US (11% of sales and 8% of the backlog), Mr Macrì somewhat downplayed growth prospects as Trump's $ 1.5tn investment plan has yet to be financed. Currently, Cmc is mainly active in New England and New York and is expanding towards Florida. Last year, it pursued an M&A opportunity but dropped out of the race as valuations soared after Trump's election. Going forward, development should remain organic with good opportunities for projects to be executed by the group on its own or in partnership. Longer term, the US could represent 25-30% of international sales vs. less than 20% now.Future decline in net leverage largely driven by ANAS settlements - Cash generation has given rise to some investor dissatisfaction. After a positive 2016 performance, free cash flow turned negative to the tune of € 41m in 9m 2017. Mr Macrì cited a number of one-offs: 1/ the new split VAT law in Italy (since July, it is paid by administration on a quarterly basis and no longer with bills) for € 25m, 2/ a guarantee enforced in Chile for € 19.5m, and 3/ bond issuance costs (€ 5m booked in Q3 and € 15m to be booked in Q4). Mr Macrì reiterated the target to lower net leverage from 3.9x at 30 September to 3.5x in 2018 and 3.0x in 2019, but admitted it would be largely driven by expected settlements from ANAS, the Italian road authority: after collecting € 42m in recent months, Cmc expects an additional € 116m throughout 2018 and 2019. To a lesser extent, the reduction in financial expenses and improved advances on contracts will also play a role in deleveraging.For our part, we have doubts over substantial deleveraging, as the business model is capex-intensive and geared towards Italy and emerging countries. But we also see limited risk of slippage as Cmc retains defensive features: a diversified backlog, a focus on mid-scale projects, no exposure to concessions and a good track record. We reiterate our Buy recommendation on the 6.875% 2022 and 6% 2023.