Constellium : Constellium, on track to enjoy the aluminium upswing

>Strengths / Opportunities - Good geographical diversification: the acquisition of Wise Metals in 2015 helped Constellium improve its geographic diversification, strengthening its foothold in the US. Europe accounted for 55% of revenues in 2015, followed by North America (35%) and the Rest of the World (10%).Diversified and dynamic end-markets: Constellium serves three distinct end-markets. While Packaging is characterised by its resilience, Constellium should be able to seize the growth opportunities linked to the increase in the use of aluminium in the Aeronautics and Automotive sectors (in the BiW in particular).New management: Jean-Marc Germain, new CEO since mid-2016, is looking to implement a more cautious financial policy. Emphasis will be on optimising capital structure, reducing leverage and improving the group’s rating.Weaknesses / Threats - Lack of transparency and unclear strategy: since the acquisition of Wise Metals, Constellium has, several times, surprised the market (disappointing results, changing Wise Metals’ financing plan, issuing a secured bond) which has criticised its lack of transparency and opaque strategy. Management should be able to clarify its objectives during a presentation for analysts in March.FCF penalised by the ambitious Capex plan: the group announced a significant Capex plan during the acquisition of Wise Metals to increase its production capacity for BiW in the US ($ 750m over seven years). Even though it has been revised downwards ($ 340m), Capex should continue to weigh on the group's FCF generation (-€ 180m estimated in 2016).High level of debt and leverage: Constellium was penalised by the acquisition of Wise Metals, which was fully financed by debt. At the same time, deteriorating results and FCF (1e142m at end-September 2016) caused an increase in leverage (5.1x).Credit Opinion: Stable / Market recommendation: Buy - We have a Stable credit opinion. The Wise Metals acquisition at end-2014 hampered Constellium’s results, which have faced negative FCF generation as well as high debt and leverage for several quarters. The packaging end-market resilience and an increased penetration of aluminium components in the automotive and aerospace industries should help the group improve its results. The start of an upswing in Wise Metals, the group’s shift towards higher value-added products and the various cost optimisation measures should also have a positive impact on EBITDA which is expected to grow in 2017. FCF generation is also expected to improve and leverage is set to decrease due to a more cautious financial strategy led by the group's new management team.We have a Buy recommendation on the euro-denominated unsecured 2021 and 2023 bonds. Given more positive outlook and the arrival of a new management team willing to optimise the group's capital structure, the two papers’ ASW spread should continue tightening observed since the summer, globally in line with the CCC index. We have a Buy recommendation on both bonds with a preference for the 23 paper, given its more attractive YTW (5.9% vs. 4.9% for the 21 paper).