Rexel : The outlook is getting brighter

Wednesday 1 March 2017 - - - - - Equity data - Reco: Neutral - Target: € 12.50 - Equity analyst: Alfred Glaser - [email protected] - +33-1 44 51 88 93 - - Corporate governance: Opportunity (2) - / - / - - - - - We are raising our credit opinion to Positive from Stable following the release of 2016 results and revised medium-term financial targets. We take a positive view of the new measures announced by Rexel, which should initially accelerate deleveraging for two years before providing more leeway for bolt-on acquisitions. - As our analysis (see page 7) compares the current yield of Rexel's bonds relative to similar bonds and their greater or lesser likelihood of being called in terms of uncertainty about future trends in market conditions, we are prompted to: 1/ recommend a buy-and-hold strategy on the 2022 Rexel bonds callable in 2018 (YTW of 1.3%); 2/ reiterate our Neutral recommendation on the 2023 Rexel bonds callable in 2019 (YTW of 2.1%); and move to a Reduce recommendation on the Rexel 2024 bonds callable in 2020 (YTW of 2.6%). - > - Support factors - . Strong position, with around 60% of sales generated in markets in which the group ranks first or second and a wide variety of end-markets.. Worldwide market with good long-term growth prospects (.e.g. the development of access to electricity, awareness of energy issues, technological progress, regulatory environment, etc.).. Quarter-on-quarter sales growth in Q4 (flat vs. -2.5% in the first nine months of the year), posted in the three major geographical areas. . More favourable outlook for 2017 (guidance for resumption of organic growth and an increase in adjusted EBITDA margin while lowering gearing).. Good responsiveness of the cost structure to sales trends.. Low spending needs (capex-to-sales of 0.9% in 2016) fostering high free cash flow (FCF-to-EBITDA of 42% after interest and tax in 2016).. Determination to reduce leverage no higher than 2.5x at each year-end starting from 2018 (vs. 3x previously).. Strong liquidity position and reduction in interest expense through regular bond and bank debt refinancing operations. - Points to watch - . Cyclical sector, dependent on economic conditions and industrial capex in particular, and construction and renovation spending.. Several challenges have been straining operating results over the past two years (e.g. oil & gas, Chinese slowdown, mixed conditions in Europe and lower copper prices). . With the Brexit vote, Rexel is in the near term exposed to translation risk deriving 7% of it sales in the UK and in the medium-term risks on sales and operating margin in the event of recession across the Channel.. For the two ratings agencies, the ratios are somewhat stretched in relation to the current rating, even though they confirmed the group's ratings and stable outlooks. The new strategic objectives should help the group regain significant leeway.