The explosion at Japan’s Fukushima plant provides new work for Alstom, one of Europe’s largest engineers. Governments will now reassess the suitability of any new nuclear build, and test that existing plants can withstand natural disasters. Only last Tuesday France’s prime minister, François Fillon, ordered inspections of all the country’s 58 nuclear sites. Alstom’s power division (52% sales), which manufactures gas/steam turbines and provides pollution control, maintenance and nuclear safety services is set to do well.
Furthermore, Alstom is the number one supplier of retrofits for steam turbines used in gas/coal-fired stations, with a global installed base of roughly 25%. Should there be a shift away from nuclear power, this servicing outfit should receive a lift too.
Elsewhere, the company is the world leader in high-speed rail, a sector that is set to boom over the next decade. China plans to lay 30,000km of new track by 2015 in order to connect all the country’s major cities. That will boost the size of the domestic market by about 500%.
Alstom is the brains behind the award-winning TGV, AGV, Pendolino and Eurostar trains, together with selling a full range of locomotives, carriages and signalling systems (26% sales).
Alstom (PA: ALO), rated a BUY by Silvia Quant
Lastly, Alstom is also a major player in the rapidly expanding space of high-voltage transmission and smart-grid technologies (22% sales). Here the Americans are expected to pour billions into upgrading and connecting their numerous standalone power grids.
In total, all three divisions are exciting growth platforms, supported firstly by the long-term trends of industrialisation/urbanisation, and secondly by the West’s urgent need to improve its often dilapidated power and transport infrastructure. What’s more, I reckon Alstom’s repair and maintenance activities in aggregate account for about 30% of revenues and deliver about 45% of profits.
So based on its gigantic €46.2bn order book, the group should be able to achieve turnover and operating profit of €21.3bn and €1.6bn respectively for the year ending March 2011. Its €1.24 dividend (3% yield) should be maintained.That’s why I would rate the stock on a ‘throughcycle’ earnings before interest, tax and amortisation (EBITA) multiple of ten.
Assuming sustainable margins of 8% and adjusting for net debt of €1.5bn and a €1.3bn pension deficit generates an intrinsic worth of €49 per share. As for risks, Alstom could be hit by another severe recession, and the strong euro isn’t helping its export markets. There could also be a temporary hiatus in new power-station builds if regulators require tighter safety measures. Nonetheless, Alstom is a quintessential long-cycle play. Silvia Quant has a target price of €52.
Recommendation: BUY at €41.20