Which are the best companies that will be able to make the most of the improvement in the Italian operating context in the coming years? The photograph was taken by the Standard & Poor's rating agency in the just published annual update "Italy corporate credit outlook 2015-2016".
At the corporate level, the recovery will concern the innovative and export-oriented companies that are internationally competitive and smaller companies that restructure and consolidate to improve their profitability. At the same time in the last three years the gap between the most profitable and the least profitable companies has widened while international companies are increasingly aiming for Italians with the value of deals reaching 22 billion euros at the end of August, an amount already higher than full-year 2014. At the rating level, S&P expects credit quality to stabilize and remain at current levels for the remainder of 2015 and into 2016.
WHO STARTS AGAIN. AND WHO LESS
Industrial production and consumer and business confidence are recovering driven, explains S&P in the report, by factors external to Italy, such as unconventional monetary stimuli, falling comfort prices and a weaker euro. “They have also been helped – adds S&P – by the pro-business reforms of Prime Minister Matteo Renzi's government. But it remains to be seen whether this stimulus will be sufficient to support a return to significant growth by the Italian body sector”.
Experts believe that the recovery will be quite polarised, the most innovative and export-oriented companies will be favoured, and which will only be able to partially help those companies whose profitability “has deteriorated to the point of making the levels of financial leverage unsustainable, and for which the only solution is the restructuring".
To weigh down companies oriented to the domestic market, in addition to the anemic dynamics of domestic demand, also the overcapacity condition in which some of them find themselves, above all in heavy industry. The consumer and light manufacturing sectors are therefore better positioned to benefit from some recovery in consumption.
INVESTMENTS IN RECOVERY
S&P expects that between 2015 and 2016 iCorporal investment is starting to recover after several years of decline, supported by an improvement in access to credit. "It will be a question of modest variations but already seeing a plus sign after years is encouraging", said Renato Panichi Senior Director Corporate of S&P speaking at the Italy Corporate Event 2015 organized by the rating company in Milan. Since 2008, business investment has fallen by a third, falling to 9% of GDP from 11%, mainly due to weak business confidence, falling demand and the credit crunch. "Constraints that are gradually breaking down - points out in its S&P report - the increase in business confidence, the improvement in the availability and cost of bank loans, the growing demand for credit from companies will probably translate into a moderate expansion of investment corporal in 2015-2016”. According to the economists of the racing agency, the expansion will mainly concern the manufacturing, telecom and automotive sectors, since the utilization of production capacity here is gradually recovering.
A POLARIZED VIEW
S&P notes that between 2012 and 2014 there has been a growing polarization of the profitability levels of Italian companies. In the rating agency study, the difference in Ebit margins between the best and worst decile of the sample increased by about 600 basis points between 2012 and 2014, and most of this is explained by the deterioration of profitability in the decile lower. “This – write the experts – confirms the view that the current recovery will be polarized within each business segment. It is unlikely that the recovery will have benefits for those companies whose profitability has deteriorated to such an extent that their financial leverage reaches unsustainable levels, for which the only solution is restructuring”. In particular, the financial leverage of Italian companies, measured in terms of debt/EBITDA ratio, has increased significantly in the last two years with a peak of 3,7 in 2014 (3,5 in 2009), above the European average (3 times ), precisely because of the reduction in profitability rather than the increase in debt.
M&A, THE ITALIAN COMPANY IN THE SIGHT
“Italian companies are courted”, write the analysts of S&P noting that in the first half of 2015 acquisitions and foreign buyers soared. At the end of August, transactions had already reached 22 billion euros, already well above the 14,2 billion in the same period a year earlier. All with high-profile transactions: from ChemChina on Pirelli to Dufry on Wdf. “Many attribute the sudden interest in Prime Minister Matteo Renzi's economic and institutional reforms. Moreover, after three years of degrowth, the economic conditions are stabilizing”, write the analysts, specifying however that it is a phenomenon that had already begun to manifest itself since 2010, also in relation to the need for generational change of many companies in the to families. An example is the case of Italcementi which was sold to HeidelbergCement, or Indesit's transfer to Whirlpool.
In vogue it is above all the consumer discretionary sector that dominated, with six transactions, the Italian M&A market in terms of volumes. The most popular sectors are clothing, textiles and luxury goods, automotive components, hotels, restaurants and entertainment but also retail and media.
