jpmorgan su avanza ag spring
Weak Q1 Results, Continue to Prefer the Seniors - ALERT
Avanza Q1 results missed our forecast in a seasonally soft quarter. We remain Neutral Avanza, but are cautious and prefer the seniors (7.5% ‘18) to the subs (9.5% ‘19). While we are somewhat encouraged by improved suburban volume trends and the company’s outlook for cash flow stability in 2014, we see heightened execution risk in extracting cost savings from a reduced network and expect continued margin erosion through the integration of Zaragoza/Madrid.
Passenger volumes increased 0.5% y/y in the first quarter. Suburban passenger volumes declined 1% y/y, an improvement from 2013 levels when quarterly declines ranged from 4-8%. When stripping out the tramway effect, urban passenger volumes (-5.6% y/y) continued to feel the impact from the amended Zaragoza concession. Avanza saw further competitive pressure from Renfe in long-distance in the quarter as well.
Revenues and EBITDA were down 9% y/y and 25% y/y, respectively. Revenue declines were largely due to the new Zaragoza concession, which went into effect on 1 August last year. EBITDA was down 25% y/y to €15m (vs our €16.5m estimate). Avanza expects fixed cost savings to materialize slowly. It estimates a six to twelve month time lag from the inception of the new Zaragoza and the Madrid cut.
Cash flows were muted due to lower profitability, but liquidity was roughly flat sequentially. Avanza reduced its financial lease obligations by €5m primarily as a result of a reduced fleet. Avanza had €51m of total liquidity at 31 March including €35m of cash and €16m available under its RCF. The company expects to be roughly cash flow neutral the remainder of the year and report ending cash of ~€30m at YE14.
Although net debt was roughly flat on a sequential basis, leverage rose in the quarter on the back of EBITDA declines. Net leverage through the seniors and subs was 4.2x and 6.4x, respectively, up from 4.0x and 6.0x at YE13. As Zaragoza and Madrid flow through the P&L for the balance of the year, we expect net leverage to approach 4.5x and 7.0x for the seniors and subs, respectively, by 2H 2014.
Tarrasa: Tarrassa was awarded to TCC (local Catalan operator 33% owned by Barcelona urban transportation public co.). Avanza is appealing (court decision expected within three months), noting that EU transport regulation restricts companies receiving influence from public administrations from competing in public tenders outside their jurisdiction. Tarrasa makes up ~3% of Avanza’s revs (€12.5m).
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