Galapagos : Galapagos' rosy future is a long time coming

>Strengths / Opportunities - Strong positions in a niche market. In a fragmented market, Galapagos affirms that it is one of the leading company worldwide in terms of market share in manufacturing heat exchangers (Kelvion).Diversified customer base and geographical spread. The group provides equipment and solutions to customers in more than 130 countries. It generated 42% of its 2016 sales in Europe, 20% in Asia-Pacific, 20% in North America, 8% in Africa, 6% in the Middle East and 5% in South America.Broad range of products, unlike most of Galapagos' competitors, which provide only certain types of heat exchangers.A root-and-branch reorganisation process, but the effects are not yet visible. The restructuring measures introduced in 2016, such as the sale of DencoHappel, aim to address the group's organisational weaknesses and help it withstand a challenging economic environment. They should pave the way for a steady improvement in the group's earnings and credit metrics.Weaknesses / Threats - Cyclical businesses. Demand depends on investments made by companies exposed to cyclical markets. Still, equipments furnished by Galapagos are indispensable for many production systems and represent a small share of industrial investment. Concentration of the group's activities, exacerbated by the sale of DencoHappel in October 2016. The Power end-market represented 39% of 2016 sales.High restructuring costs (€ 25m in 2016). They are likely to remain high in the two years ahead and are set to put a drag on the group's reported EBITDA and FCF generation.Significant leverage. Given the challenging environment and restructuring measures, the group reported lower earnings in 2015 and 2016. The leverage reached 11.1x (reported EBITDA) and 5.6x (adjusted EBITDA) in 2016. Fragile liquidity. Although Galapagos has no significant repayment deadlines before 2021, it regularly uses its credit facility (€ 20m drawn at end of 2016 and peaking at € 55m in Q2), while its cash resources are likely to be dented by FCF burn anticipated in the coming years (1e€ 24m in 2017 by our calculations).Credit opinion: Stable / Market recommendation: Neutral - Most of Galapagos' end-markets are showing encouraging but modest signs of recovery in 2017, which should help the group to see an increase in order intake, whereas sales should level off given the low level of orders booked during 2016 and a difficult start of the year at Enexio. For this, management was forced to revise down its targets for 2017. The restructuring measures are set to boost the group's results further out, but in 2017 earnings are likely to continue to be squeezed by restructuring costs which will weigh on credit metrics, especially liquidity which could decline further. We would prefer to wait for clearer visibility on the group's ability to restore its operating results and are adopting a Stable credit opinion and a Neutral market recommendation on the bonds.