Orano : Focus on a new strategic plan covering the 2018-2020 period.

Publication date 18/04/2018 16:25 - Writing date 18/04/2018 16:24 - - - Target : 2.50 EUR - Analyste Equity : - - - Analyste ESG : XXX - Corporate Governance: - - - - - - - - We maintain our Neutral recommendation on the bonds which still offer some relative value compared to 'BB+' rated bonds. - >Support factors - - Orano has strong competitive positions in its core businesses, good geographical diversification of its activities and high quality mining sites and reserves. Entry barriers are high in this sector (capital intensity required to develop activities, long-term customer relationships, technological expertise and safety imperatives), hindering the emergence of new operators. - All stages of the restructuring plan have been completed under the agreed terms and management can now focus on its new strategic plan covering the 2018-2020 period. - Liquidity is no longer a concern after the state's recapitalisation (€ 2.5bn finalised in July 2017, which was complemented by a € 0.5bn capital increase reserved for Japanese partners Japan Nuclear Fuel Limited and Mitsubishi Heavy Industries on 26 February 2018). Orano is now 45.2%-owned by the state, 4.8%-owned by France's atomic energy commission CEA, 40%-owned by Areva SA, 5%-owned by JNFL and 5%-owned by MHI. - Orano plans to generate sustainable positive free cash flow, starting from this year. - S&P recently upgraded the group's rating from 'BB' to 'BB+' with a stable outlook. The agency welcomed the finalisation of the financial restructuring plan, the sale of New NP (now dubbed Framatome) to EDF in December 2017, the completion of the savings programme (€ 477m annually vs. 2014) which will be complemented by another cost reduction programme (€ 250m annually from 2020), and management's commitment to reduce net debt after 2018. Points to watch - - Orano posted poor 2017 results, hurt by a drop in volumes and, to a lesser extent, an unfavourable price/mix effect, on top of significant one-offs (impairment losses in mining and front end activities). The prices of uranium, conversion and enrichment remain under pressure. - - The group does not foresee a pick-up in profitability before 2020 (while EBITDA margin declined from 30.4% in 2016 to 24.1% in 2017, it is expected at 20-23% in 2018 then 22-25% in 2020). - - Despite the state recapitalisation of € 2.5bn, credit metrics remain weak in absolute terms (adjusted net debt/EBITDA: 4.7x and adjusted FFO/net debt: 15%). - - Uncertainty related to the government's multi-year energy plan (document setting out strategic priorities in terms of energy transition and policies), which will be unveiled at the end of 2018 and will notably list the terms to reduce the nuclear power share in the energy mix. - More globally, it is still likely to see new projects postponed or cancelled as some governments decided to curb the share of nuclear power in the energy mix in France.