The railway construction company Talgo accelerates its plans after a first half of the year in which it seems to have left behind all the difficulties of the pandemic, the supply crisis and inflationary tension after sealing a succession of agreements and orders that guarantee sufficient workload for the next five years. It does so while waiting for its big bet, the Avril high-speed train, to begin its commercial operation with Renfe, a milestone that is expected in November.
The performance of these new units could open the door to new business in Eastern Europe, where a variable gauge train is necessary to connect Moldova or Ukraine, which still retain the Russian gauge, with a European Union that has already revealed its intention to help in the reconstruction of the territory after the Russian invasion.
Revenue improvement drives performance
The different analysts consulted by La Información predict good results at the end of the second quarter, which are expected to be published on Thursday afternoon, supported by a progressive improvement in the business derived from the execution of the order book. Renta4 expects a substantial improvement in revenues compared to the same period last year, when Talgo had a “below normal” activity. Its estimate places revenues for the first six months at €263.7 million, up 21.1% year-on-year.
It also estimates an improvement in EBITDA of 36.6%, to 31.9 million, “as a result of the normalization in the pace of execution of contracts”; an increase in margins to around 12% (compared to 10.7% in the first six months of last year) and net debt to grow to 125 million euros, in line with the company’s consideration.
New cash generation cycle
GVC Gaesco analysts also expect “remarkable sales growth” due to “increased manufacturing activity.” Its forecasts are somewhat higher, of about 268.7 million in sales and an Ebitda of 32.7 million, but also aligned with Talgo’s guidance.
Blackbird Broker is between the two and estimates revenues of 265 million in the half, with an adjusted EBITDA of 32 million. Its analysts focus attention on the company’s cash generation, which they consider “stagnant since 2019” and that should start a new cycle after the signing of the last contracts. “Talgo accumulates a whopping 416.1 million euros in customers and accounts receivable, a dangerous item that weighs down the price,” they say.
“In fact, it is of special interest to see how the acceleration in the manufacture of orders from Germany and Denmark impacts on outstanding invoices, since the delay in the delivery of Avril trains to Renfe represents a significant financial burden for the company, which hinders the conversion of Ebitda into net profit”, they add in their comment.
A below-expected stock
All of them agree in their valuations of overweight the share, which as of July 26 stands at around 3.50 euros per share. Renta4 places the value at around 5 euros per share, while GVC Gaesco sets a target price of 4.40 euros / share, considering a potential of 25.7% over the current one. “We continue to be positive with the evolution of the value,” says its analyst Íñigo Recio.
Several of the issues that Talgo has open in terms of contracting remain to be known, such as the indexation of its contracts to the price increase derived from inflation; possible contract extensions in Saudi Arabia and Uzbekistan or open negotiations with private operators in France and Spain. These would go through specifying the pre-agreement of 10 trains with Le Train or Iryo’s interest in expanding its fleet to extend operations to Galicia or Asturias.
Waiting for the Renfe penalty
The order book at the end of the second quarter will be around 4,300 million euros, according to Renta4, after the construction company has closed and announced large agreements in recent weeks, such as the 100 new trains for Egypt or the extension of the order of 56 trains of the Talgo 230 model for the German Deutsche Bahn in exchange for 1,400 million. This amount could increase if the maintenance agreement for these units is closed. “It would be very positive because the margins are higher,” GVC Gaesco said.
The conflict opened with Renfe over the delay in the delivery of Avril trains is also still pending, after the operator announcese its intention to activate penalty clauses for more than 100 million euros. The latest information regarding this procedure, revealed by this medium, point to the hiring of a damage expert by Renfe. For Blackbird, these expert reports “are proof of cause and it would be good to understand if Talgo has news in this regard.”
