Alstom shares slump as weak power orders hit margin and cash goals

PARIS Tue Jan 21, 2014 10:25am EST

PARIS (Reuters) - French heavy engineering group Alstom (ALSO.PA) lowered its profitability and cash-flow targets on Tuesday on the back of weak orders for power equipment, raising the specter of a dividend cut and sending its shares down 13 percent.

The maker of power station turbines, wind farms and high-speed trains said orders fell 12 percent in the first nine months of its fiscal year and warned it would keep burning through cash in the second half, after draining 511 million euros ($693 million) in the first.

Chief Executive Patrick Kron told analysts he expected positive free cash flow in the following fiscal year but would not make that a firm target, saying his credibility was at stake after the latest guidance cut.

Kron also said the latest results did not bode well for the company's dividend, something that would be addressed by the board later in the year.

Alstom has been securing record orders for trains and trams, but demand for the huge turbines and other components it supplies to coal and gas-fired power stations has waned. Yet sales in thermal power still account for close to 45 percent of group revenue, against little over a quarter for transport.

The power equipment takes years to install and usually comes with hefty downpayments that underpin cash flow at Alstom and its European rivals Siemens (SIEGn.DE) and ABB (ABBN.VX).

Underlining the volatility of the business, Alstom has burned cash for half of the past decade, Reuters data shows. In an attempt to steady its finances, Kron pledged last year to cut 1.5 billion euros of annual costs by 2016.

"The expected deleveraging process was the main support to the shares, but is further postponed. Confidence is broken," Societe Generale analysts wrote in a note.

Alstom shares were down 12.3 percent by 1408 GMT, close to a two-year low. The drop wiped more than 1 billion euros off its market value. Shares in Bouygues (BOUY.PA), Alstom's main shareholder with a 29 percent stake, fell 5.3 percent. Both were the biggest losers on France's CAC 40 index .FCHI.

The dearth of large orders in thermal power comes as utilities delay spending in a weak global economy. In some European countries, government caps on electricity bills and competition from renewable energy have made traditional power stations fired by coal or gas less profitable.

MARGIN SQUEEZE

Alstom kept a full-year forecast of low single-digit sales growth from existing businesses, but said it expected its operating margin - a measure of profitability - to dip slightly to around 7 percent this year, before declining again in 2015.

It had previously aimed for positive free cash flow for the year and a stable operating margin at 7.2 percent, which it would try to improve to 8 percent within three years.

Alstom said in November it planned around 1,300 job cuts and said it would sell up to 2 billion euros of assets, including a minority stake in its transport unit, which makes France's prized high-speed TGV trains.

That announcement was met with a cool response from the Socialist government, whose centre-right predecessor already bailed out Alstom when it ran into similar trouble a decade ago, stretching European competition rules to rescue a company seen as a champions of French industry alongside Peugeot (PEUP.PA) and EDF (EDF.PA).

Nomura analyst Daniel Cunliffe said Alstom should forego a dividend and launch a share issue to fill the cash hole, or else it would have to sell an even bigger stake than planned in the transport unit, further squeezing future earnings.

"Do a rights issue, cut the dividend - the only person you'll annoy is Bouygues and you'll keep the family silver which is the transport business," Cunliffe said.

In the third quarter, the transport unit booked a record 2.57 billion euros in orders, driven by a 1.2 billion contract to equip Riyadh's subway, helping offset a 4 percent drop in orders in thermal power.

The last time Alstom shares fell by as much in one day was in May, when it cut its sales forecast for the next three years, saying customers were delaying projects.

The month after, Moody's lowered Alstom's long-term credit rating to Baa3, one notch above "junk". Standard & Poor's, which rates Alstom BBB, also said it may downgrade its debt.

Kron insisted in November there was no need to ask shareholders for more capital and on Tuesday did not mention such a scenario. He said he was confident the company would raise up to 2 billion euros by asset sales. And he saw no need to renegotiate debt covenants.

Group orders stood at 5.62 billion euros in the quarter, up 11 percent from a year ago. Nine-month sales fell 1 percent to 14.53 billion and were up 3 percent on an organic basis.

(Editing by Tom Pfeiffer and David Holmes)

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