CAF continues at full speed (P.O 47.89 euros/share (potential + 22.80%)

CAF

Sabadell | Despite the poor performance of the stock this year (-3% vs IBEX) and especially since the beginning of April (where it reached its maximum of 44.25 euros / year / -12% since then), possibly due to an market towards more defensive values, until now we see no reason to stop trusting CAF. The entry of orders remains strong and the doubts that could come from the side of the downward trend of the margins would already be included in our estimates (and partially in consensus). In addition, there may still be catalysts in the remainder of the year in the form of new orders (eg> 3,000 M euros in Renfe tenders).

Results for 1T’19. Strong commercial activity, which translated into an order intake of 1,442 M euros (which today exceeds 1,850 M euros), contrasting with the 143 M euros of 1Q’18 and the 2,902 M euros of the full 2018, and that represent 84% of our estimate of order intake for the entire year (which we have increased + 20%, although not at the recurrent level). Sales also increased significantly (+ 45% vs. 1Q’18), although very impacted by the consolidation of Solaris (+ 12% ex-Solaris). Margins were again slightly below the estimate (EBITDA margin of 9.0% vs. 9.7% BS (e) and consensus of 9.4%), although given the volatility of the quarterly margins and the impact of Solaris ( that do not break down) it seems early to extrapolate these margins to the rest of the year.

The challenge of integrating

The results of this exercise will be significantly impacted by the recent acquisitions of Solaris (Sep 18) and Euromaint (closing estimate July 19). The latter is not yet included in our estimates. Thus, inorganic growth will be + 17% (+ 21% with Euromaint) against organic growth of + 8.7%. However, we anticipate that these acquisitions will negatively impact the CAF margins:

Solaris (20% sales’19e). Manufacturing business whose margin is lower than that of services. Thus, we expect an EBITDA’19e margin of 6.0% vs 9.3% for the consolidated CAF and 18% BS (e) for maintenance services. The guidance provided by CAF is to approximate double-digit margins in the coming years. 

Euromaint (6% sales’19e proforma). We estimate that it will contribute initially low margins (EBITDA’19e margin of 5.5%), in spite of being a company fundamentally focused on services, insofar as it is coming out of a complicated situation and where CAF still has a lot to do. The firm expects to approximate the margins to those of his services division in the coming years. 

We reviewed estimates incorporating Solaris and adopting a more conservative stance in relation to the evolution of margins (-60 bps in EBITDA’19e margin vs before), so we expect sales growth of + 26% (+ 30% including Euromaint ) vs 2018 (TACC’18-21e of + 13% in line with consensus) and an EBITDA’19e margin of 9.3% that drops to 9.0% in 2021 (vs. 10% consensus). Net debt19e would be 2.3x (2.5x proforma with Euromaint).

All in all, we reviewed our P.O. -2% to 47.89 euros / acc. (+ 23% potential) and we reiterate our recommendation to BUY. Our valuation shows implied multiples of 9.3x EV / EBITDA’19e (-7% vs comparable and -18% vs historical average) and 25.3x PER’19e (+ 5% / -10%).