Gemalto : 2017 … invalid PIN code!

Gemalto reported a decline in 1Q17 sales (down by -6% yoy and by -8% yoy on constant currency) following a slowdown in all of its businesses, particularly in the US payments. The group was also forced to make its third profit warning in only 6 months, which emphasizes management’s low visibility and the prolonged weakness of two of Gemalto’s largest businesses this year (i.e. Mobile SIM and Payment, representing 18% and 30% of pro-forma revenues in 2016). We now forecast a -12% organic decline of Gemalto’s adjusted EBIT in 2017 (excluding the 8-month contribution of 3M’s Identity Management business) and we decide to adopt a more cautious approach: our Credit Opinion is revised to Stable (vs. Positive). The latter also factors in the group’s positive FCF (EUR 252m forecasted in 2017e) which should help to limit the downside and maintain the net leverage at a low level (slightly above 1.0x on a pro-forma basis). - > - We downgrade our recommendation on the 2021 notes to Reduce (vs. Neutral). The spread of Gemalto’s 2021 notes (Ytw of 0.9%, Asw+69 bp) has not reacted to the recent profit warnings and the notes remain expensive on a relative basis compared with the bonds of other non-rated French issuers. For instance, Biomerieux 2020 notes (Oddo estimated rating: BBB+) offer a higher spread (85 bp) for a shorter duration, while the 2021 notes of Ingenico and Vilmorin (BBB- estimated) offer a spread premium of at least 35 bp that more than compensates for their lower estimated rating, in our view. Though, Gemalto’s 2021 notes still offer a spread pick-up of 35 bp over BBB-rated bonds with similar maturities. Our previous Neutral recommendation is no longer justified given the tight pricing and the expected weakening of Gemalto’s operating results in 2017, as opposed to an improvement previously.