(Debtwire) Rekeep faces tendering activity delays but low leverage and robust liquidity counter legal risks

Debtwire 25 March 2020 | 15:41 GMT

Rekeep (formerly Manutencoop) will face a slowdown in tendering activity while legal headwinds on its FM4 tender loom large. Impacts from the coronavirus (COVID-19) pandemic could also be larger than acknowledged, despite 56% of the group’s revenues deriving from the healthcare sector. On the flipside, the Italian facilities management company is just 2.7x net levered and has EUR 330m available liquidity including non-recourse factoring and revolving facilities, making its EUR 360m 9% senior secured 2022s attractive for one buysider and one deep-dive analyst, with a second buysider cautious.

The company reported 4Q19 results yesterday (24 March) and held an earnings call to discuss the performance. Management noted there had been no negative impact on the business from the coronavirus to date, with 56% of revenues coming from performing mission-critical services in the healthcare sector. Positively, Rekeep operates in other essential service sectors such as telecommunications, large-scale distribution and the banking sector.

However, when pushed during the investor question and answer session, the executives noted there has been a stop in contract tendering activity with people not being able to access the public administration department. The lockdown in Italy has also meant some reductions in private sector activity.

The coronavirus situation has provided delays in legal action proceeding against Rekeep, and the TAR decision on the FM4 investigation – scheduled for 6 May – could be postponed because of the pandemic. Its other Santobono hearing at the Italian Supreme Court, originally pencilled in for 10 March, has already been postponed.

Regarding the FM4 legal decision, the company agreed to pay 72 monthly growing instalments in deferred payments since January 2020, meaning that it has already paid three instalments of around EUR 1m each at an implied rate of 4.5%, with payments to either be refunded in the event the TAR rejects the fine, or to be decreased proportionally in case of a fine reduction. Rekeep’s possible fine imposed by the Italian Competition Authority (ICA) in May last year was estimated at EUR 91.6m.

“The release was bad in terms of having pro forma adjustments for example, but the key point that is emerging from this current earnings season is that it is all about the outlook and Rekeep have a resilient underlying business being in healthcare; they were reassuring [as] the healthcare projects [are] getting increased demand, the government can help with other suffering sectors while legal issues could be kicked down the line,” one of the buysiders said. “It’s a resilient name and has a business profile that will benefit from its focus on healthcare.”

“The results seemed okay and the healthcare proportion will benefit them. But I’m still unsure on the impact on other sectors and they may have to reduce some of their temporary workforce while it is unclear how much the Italian government will provide support and how much the company will have to pay for a temporary workforce reduction,” the second buysider pointed out. “Cleaning should still benefit but if other revenues go down, they could be impacted.”

Rekeep on

Should the FM4 investigation go against Rekeep, the company still has a strong liquidity position to weather the storm. Rekeep had EUR 330m available liquidity at 4Q19 pro forma its Sicura disposal cash. This included EUR 100.1m cash on balance sheet, EUR 50.2m of Sicura proceeds, EUR 4.8m available short-term financial assets, its undrawn EUR 50m revolving credit facility and EUR 124.9m of available non-recourse factoring lines.

Metrics remain low with the group just 2.7x net levered at 4Q19 on a pre-IFRS16 basis pro forma the Sicura disposal proceeds, with adjusted pro forma net leverage climbing to a still manageable 3.5x when adding the potential EUR 91.6m fine to net debt. The business also has the potential to generate decent free cashflow next year. With a 4Q19 LTM pro forma EBITDA of EUR 110.8m, it could face a similar EUR 32.6m capex, EUR 33.9m interest and EUR 6.7m of cash taxes, which would mean EUR 37.6m of free cashflow head or 0.3x deleveraging per year ahead of working capital movements. Positively, on working capital, days sales outstanding reached 161 days at 4Q19 versus 168 days at 4Q18.

The group deleveraged in FY19 pro forma the Sicura disposal proceeds, though it spent EUR 19.2m of M&A activity and paid a EUR 13m dividend. Excluding these discretionary expenditures would have led to a marginal net debt reduction on pre-IFRS 16 numbers.

Earnings could take advantage from the recent acquisition of Polish business Naprzod. Almost 100% of the Naprzod client base operates in healthcare, with Rekeep acquiring 80% of the shares on 30 October. Its first tranche payment in cash has occurred on closing while a deferred payment is due in 4Q20. There is a downside risk protection mechanism on this, with the deferred payment based on actual LTM performance of EBITDA and net debt.

“Results were reassuring, and they have liquidity. The Polish business helps diversification away from the Italy risk and in the near-term, it seems that organic growth could be strong. They could still have low double-digit organic growth in Poland, and this will help,” the first buysider noted. “The only [concern] is the legal issues and they always seem to get caught in these scandals, but they are often hard to quantify and may get deferred in the current climate.”

“Liquidity could become tricky when revenues go down while an EBITDA hit could still be quite material,” the second buysider commented. “The non-pharma part of the business can be hit, and they may need some government aid.”

Backlogs to the Wall

The group order backlog is now at its highest level since 2016 with EUR 2.8bn equating to 2.7x its revenues as the acquisition of Naprzod improved the final group backlog by EUR 200m.

Group earnings were stable throughout the year with FY19 normalized EBITDA of EUR 113.6m being slightly up versus the EUR 110.8m at FY18. 4Q19 pro forma EBITDA of EUR 28.7m was up 1.1% YoY versus EUR 28.4 at 4Q18.

Rekeep’s EUR 360m 9% senior secured 2022s rose around four points to be indicated this morning at 81.25-mid yielding 19.8% to worst, according to Markit. The bond is redeemable at 104.5 from mid-June this year with the schedule stepping down to 102.25 from mid-June 2021 and then to par from mid-December 2021.

“The bonds look attractive on a three-month view and if one wants to take Italian risk, this is a name you’d definitely take. Underlying new cases in Italy have declined and the negative newsflow could be reaching a plateau. On a refinancing, people often think current market conditions can last forever but it’s untrue as the market should eventually recover and this will present opportunities for companies to refinance,” the first buysider said. “A 2021 maturity would be tricky, but 2022s to refinance should be fine. Long-term the current crisis for Italy and other governments shows there needs to be renewed focus on the healthcare sector for each country and this should benefit Rekeep. Legal risks can always be appealed, and lump sum payments may not be required.”

“You need to adjust the reported net leverage metrics for the fine. The bonds are theoretically attractive, but to say there will not be an impact is probably brave. Many buildings need no maintenance in times of no use and landlords are frantically reacting to drop costs and service levels where possible,” independent deep-dive research firm Sarria said. “Our building manager for instance has laid off 90% of cleaning staff and the coffee machines are gone. Surely that will be the same everywhere and it will take time to build back up.”

The company declined to comment.

by Adam Samoon