Vallourec - Restructuring proposal, but where is the cash generation?

All,

Please find our updated analysis on Vallourec here.

We have outlined the proposed deal with various recovery values depending on EV multiples.

We are still not taking a position in Vallourec bonds. We acknowledge this position has proven wrong over the last year and the bonds are currently trading up in the high 80s. However, despite the certainty ascertained from the restructuring deal, the fundamentals of the Company remain the same.

Cashflow generation has always been a problem with this Company. From FY21 to FY25 the business is projected to generate €40m cash in total for the four years. In fact, the Company's own projections, FCF will remain negative for FY21 and FY22.

Are the projections realistic? CAPEX in 2014 & 2015 was c.7% of sales, projected CAPEX is guided at 5% of sales. Note the 2014 sales numbers include c.€600m of sales from Power Generation segment, which in reality does not exist now.

Additionally, the Company has been in cost saving mode perpetuity, with over €650m of costs already taken out of the business. Management point to further cost savings initiatives but eventually this level of cost savings will impact quality and top line revenue.

At current levels, the implied equity price is c. €5.50 a share, implying 5.0x FY2022 projections or 10.0x FY2021 projections (Company Projections).

Happy to discuss.

Tomás
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