Vallourec - 90% acceptance, but FCF illusive

All,

We have updated our model here.
Vallourec held their FY2020 call last night, but given the update two weeks prior there was no surprises. We remain puzzled by current valuations given the lack of visibility on the business returning to Free cashflow positive in the near term.

The Company gave some guidance for 2021, with recoveries already visible in North America, with increased demand in South America expected to materialise. The Middle East and Europe are likely to lag, with an impact not felt on volumes until 2022. This has increased EBITDA expectations from €221m to €250-300m range for FY21. However, the expectation for Free Cashflow remains an outflow of c. €300-380m, higher than the €273m outflow projected in for FY21 in October last year. We have a call into the Company to ascertain if this increase in outflow is related to higher Working Capital movements.

Valuations appear very expensive with Vallourec debt trading at an implied 8x FY21 EBITDA and 5.2x FY22 EBITDA. We remain cautious on the name given the lack of FCF generated by the business.

Happy to discuss.

Tomás

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