Machinery: Global Sector Report 2017

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.