Obrascon : OHL: poor 2016 results, good execution needed to stay afloat

>Poor 2016 results - 2016 results were weak and OHL missed its recourse net leverage target of <2.0x at year-end (3.7x reported), despite a EUR 250m virtual boost in the EBITDA definition (i.e. the dividend paid by OHL Concesiones to OHL SA and then transferred back to the non-recourse group). The FCF burn at the recourse level was massive (EUR 681m including investments in development projects) and was only partially offset by asset disposals, i.e. mainly the full disposal of OHL’s 13.9% stake in Abertis for EUR 1.66bn (11.4% in 2016, 2.5% in January 2017).Potential positive developments in 2017, lots of uncertainty - OHL now estimates that the future cash drain from legacy construction projects has decreased to EUR 165m in total for the 2017-18 period (vs. EUR 300m maximum previously). Furthermore, it plans to raise up to EUR 571m of net proceeds from asset rotation to reduce its recourse debt (of which EUR 344-404m relate to agreements to be signed in 1Q17). These actions and the potential obtention of a new EUR 190m RCF should give more time to OHL to try to address the cash consumption from its Construction business and restructure OHL Industrial. But there are still uncertainties: unless there is a material WC improvement in 2017, we expect OHL to continue to burn FCF at the recourse level in 2017 (our forecast is EUR -200m) and Obrascon needs its order intake to gain visibility. Furthermore, the company has a poor track record and there are execution risks related to the business recovery and future asset rotation.We have a Reduce recommendation on all straight bonds - We maintain our Negative credit opinion in the light of the weak 2016 results, our expectation of persisting FCF consumption in 2017 and weak liquidity. We prefer to see tangible signs of margin and FCF improvement before any potential revision of our credit opinion.We now have a Reduce recommendation on all straight bonds (vs. Neutral on the 2020 notes, Reduce on the 2022 & 2023 notes). OHL bonds offer among the highest yields in the HY construction space (apart from Aldesa and its restructured Spanish peers Abengoa/Isolux), reflecting the weak performance of the Spanish firm. We see some upside in case management succeeds in reaching its 0.0x-1.0x recourse leverage target at end-2017 thanks to asset rotation, but we highlight the uncertainties mentioned above and maintain our cautious view. Hence bonds could remain volatile.We also have a Neutral recommendation on the OHL Investments bonds exchangeable into OHL Mexico shares and a Reduce recommendation on the GVM bonds exchangeable into OHL shares. An update (if and when) will be made separately in another report.