Alstom: Fair Value Estimate Under Review

Alstom ALO shares dropped 37% on Oct. 5 following the firm’s announcement that cash flow was negative EUR 1.15 billion in the first half of fiscal 2023/24, caused by escalated inventory, lagging progress on the U.K. Aventra project, and subpar order placements. We are placing our fair value estimate under review pending the transition of coverage.

In a preliminary financial disclosure for the first half, the group reported 6.5% organic sales growth, surpassing its 5% guidance, and an EBIT margin increase to 5.2% from 4.9% in the year-ago period. Nevertheless, the dramatic reduction of free cash flow projections for fiscal 2023/24 from “substantially positive” to negative EUR 500 million-EUR 750 million is a blow to management’s credibility. While Alstom has maintained its midterm targets and asserted that the fiscal second half will see substantial positive free cash flow due to the mitigation of some headwinds and instituted corrective actions, the swift and unforeseen cash flow plummet has sparked investor anxiety. The shares’ Oct. 5 drop eroded EUR 2.6 billion of the company’s market value.

Alstom said that half of the cash flow dip is attributed to a surge in inventory due to an intensified production ramp-up designed to fulfill new orders while avoiding production halts and delivery postponement in the face of persistent supply chain tightness. One third of the cash flow constriction originated from setbacks in the Aventra project, an electric train legacy program inherited from Bombardier Transportation. Alstom also suffered from a reduction in down payments due to lower-than-anticipated order volume in the first half of the fiscal year.