Fives : Brighter outlook for Fives

After a further increase in the net debt/EBITDA ratio in 2016, we are expecting an improvement in 2017, driven by a rebound in EBITDA (+14% to € 131m factoring in acquisitions) and FCF (€ 48m vs. -€ 12m in 2016). Management is confident about the 2017 outlook. The group is likely to benefit from more favourable conditions in the Metal and Energy end markets, while the Automotive and Logistics segments are set to remain on a positive trend. In this regard, we are raising our credit opinion to Positive from Stable and reiterating our Buy recommendation on the 2021 Novafives notes, which performance will be shored up by improved results and lower leverage. - >Support factors - Diversified end markets and geographic exposure. The group serves six different end markets, spanning 30 countries across the world. Automotive (18% of 2016 sales), Logistics (13%), Metal (16%), Energy (21%), Cement (16%) and Aerospace & Industries (16%).Asset-light business model which offers flexibility. The group has limited Capex, representing 16% of 2016 sales.Strong positions in niche markets. The group operates mainly in niche markets and affirms it is one of the top three global players in most of its markets.Adequate liquidity. Fives posted cash position of € 120m and an undrawn credit facility of € 90m at end-2016 and has no repayment to make before 2020.A favourable shareholding structure. Management holds 52.4% of voting rights and the group did not distribute significant dividends in the past three years.Points to watch - Small size compared with peers in the sector such as Mitsubishi Heavy Industries or Siemens.Cyclical activities. Demand depends on investments made by companies exposed to cyclical markets. After a sluggish 2016, market conditions are set to be more favourable in most of its end markets.High leverage which stood at 4.6x in 2016 vs. 4.3x in 2015, due to negative FCF (1e€ 12m) and stable EBITDA (€ 115m).Weak FCF generation. The group burned through FCF of 1e€ 12m in 2016 (vs. € 9m in 2015) due to a deterioration in WCR and an increase in Capex. FCF is set to improve in 2017 (€ 48m on our estimates), buoyed by growth in recurring EBITDA and an improvement in WCR.Periodic acquisitions. Given the level of debt, we believe the group remained focused on bolt-on acquisitions and is unlikely to engage in major deals.