- Reflation and Fed rate hikes to increase input and financing costs. This could result in further cash flows deterioration if revenue growth is insufficient where activity is resuming
- Companies’ ability to grow order books as the Construction and Energy sectors are set to be in a better shape in 2017
- Currency pressures should be monitored. We expect volatility against the USD in a context of diverging monetary policies
Time for agility as revenues and input costs face a spike
The median revenues of machines manufacturers suffered a -12.7% drop in 2016 (after -2.4% in 2015). This reflects the progressive depletion of backlogs over the period as protracted low prices deterred investment decisions by clients from outlet sectors (for example construction and energy). This resulted in a decline in new orders.
As a consequence, Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) has kept decreasing since mid-2014. EBITDA in 2016 stood at 20% below 2015 level.
The stabilizing Free Cash Flow (FCF), therefore, stems from cash management rather than activity. Indeed, cash inflows have improved thanks to a tighter management of working capital requirements: inventories were down -15 days due to lower income and accounts payables were up +11 days, reflecting longer payment days to suppliers. Investments outflows have decreased -5% and are set to stabilize in 2017.
We forecast revenues to rise by a mere +1% in 2017 as investments are not set to surge. Yet longer-run prospects are more favorable. Oil-related investments should eventually resume (+4%) while the Construction sector is set to take off and boost the Machinery sector.