Algeco - Q2 20 results and comments

All,

Algeco’s +1.1% revenue growth before M&A, and 81% utilization, are the most reassuring datapoint of the results release. During the coronavirus crisis, revenue trends have become far more important than EBITDA as an indicator of long-term solvency and FCF generation. This is because costs have been significantly distorted by the variety of temporary cost reduction schemes, including furlough, tax deferrals, partial unemployment and government funded wage support. These schemes vary significantly in form and scope among different countries and sectors, and are already going away gradually. This will reveal that many capital structures have been swimming naked as revenues fail to fully recover while margins normalize back to sustainable levels. Algeco’s ability to maintain revenues during the current environment supports our view that the business is much more resilient than what most investors gave it credit for back in April.

 We are currently long the USD 8% 2023 senior secured notes. The SSN have outperformed the USD10% 2023 Unsecured notes, thanks to the EUR175m bond tap in early July.

 Key takeaways:

- Leasing and services revenues +11.1% yoy. Unit sales revenues +59.9% yoy, leading to a 23.5% yoy revenue increase.

- EBITDA organic growth of +10% yoy (+32% including M&A).

- Utilization 83% at the end of the period; 81% average for Q2 20, which suggests a strong recovery trend.

- Liquidity remains strong with EUR207m cash on balance sheet and EUR74m ABL availability. This does not include the EUR103m of cash held outside of the restricted group.

- EUR30m raised under the French PGE loan scheme.

- All geographies now in strong recovery mode.

- Company will continue to pursue acquisitions.

- No guidance given for 2H 20, but management is “cautiously optimistic” on the momentum of the business.

- Management reiterates the EUR4m negative impact in EBITDA from the coronavirus, which is NET of the temporary cost cutting measures. EBITDA margins increased was instead driven mainly y structural cost cutting and an improvement in pricing.

- Working capital in Q2 20 (especially payables) benefitted from tax deferral and other temporary measures. These will unwind in Q3 20.

- EUR30m French PGE loan is unsecured but at the level of the French operating subsidiaries. Can be used for M&A, but only in France.

Feel free to reach out if you would like to exchange ideas on the name.

Juliano