On Friday, Barclays (LON:BARC) adjusted its stance on Metso (OTC:MXTOF) OYJ (METSO:FH) (OTC: MXCYY), downgrading the stock from Overweight to Equal Weight and setting a new price target of €10.50. The move reflects concerns over the company's working capital management and the forthcoming change in its CEO position.
Barclays highlighted that Metso has experienced negative contributions to free cash flow for 11 consecutive quarters. This trend, combined with the CEO's acknowledgment that inventories are approximately €500 million above optimal levels, representing 10% of annual sales, suggests potential challenges ahead.
The analyst firm anticipates that normalizing these inventories could lead to reduced profitability, despite the company's resilience in the face of declining sales.
The firm also pointed out the record low level of contract liabilities, which currently stand at 3% of sales compared to a historical range of 8-9%. These liabilities typically indicate future revenue from larger contracts.
Barclays expressed difficulty in envisioning a scenario where working capital normalization does not affect profitability, foreseeing a potential 12% downside to consensus EBITA for the second half of 2024 and the year 2025.
Despite these concerns, Barclays noted Metso's relatively inexpensive valuation at 11 times EV/EBITA, which prevents a more bearish outlook. The €10.50 price target reflects the firm's assessment of the risks and challenges that Metso may face in the near future.
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