All,
So far, the underlying “counter cyclicality” of Loxam’s FCF has reasserted itself. Over the medium term, the valuation coverage over the subordinated bonds will depend on the extent of the recovery of Loxam’s key end market – construction. In this context, we highlight management’s caution over the trends in the construction sector in 2H 20. After that, we estimate that it is reasonable to assume that the various fiscal stimulus packages could provide a boost to the construction sector, but at this point it is still unclear how far they could go, and when they could come. This makes the subordinated notes looking expensive at only 7.3% YTW. At the same time, it is difficult to go short a capital structure in which management has both the means (significant liquidity reserves) and the intention to use it to potentially buy back some bonds.
Loxam’s Q2 20 were slightly better than the preliminary guidance provided on 29 Jul 20. The severe decline in the French, UK and Middle East businesses were partly offset by the better performance outside of France, as Loxam benefitted from the diversification obtained from the Ramirent acquisition of 2019.
Key takeaways:
- Revenue contraction at constant perimeter/FX at -24% in Q2 20. This means +10% on a reported basis (thanks to last year’s acquisition of Ramirent)
-Resilient EBITDA margin at 33%. EBITDA -25% at constant perimeter/FX.
- Total reported leverage at 5.08x, better than the 5.2x guided back on 29 Jul 20. Leverage for YE 2020 seen at 5.5x (note that all values here refer to post-IFRS 16 numbers).
- French revenues down -32.7% yoy in Q2 20. It saw a rapid improvement over the course of the quarter to only -6% yoy in June.
- In contrast with the core French business, the old Ramirent perimeter saw revenues contraction of “only” -9% yoy.
- EUR826m of liquidity at the end of the quarter. “Thanks to the comfortable level of liquidity and expected cash generation for the year, we may consider options to optimize our financing structure.”
- Loxam does not see 2H 20 business activity returning to 2019 levels. Currently, on a conservative basis, management sees revenues at -9% to -10% yoy in 2H 20.
- Even before the coronavirus crisis, activity was expected to trend down in many European markets (especially France) as the period of strong growth came to a temporary halt in 2020. The coronavirus is also having an impact. Renovations are holding up better. Impact of government infrastructure spending unlikely before 2021. Some construction being postpone or cancelled on the private market side.
- Markets that saw a sharp drop in Q2 20 (ie France, Spain, Italy) continued to see a strong recovery in July, while market that saw a smaller drop (ie Nordics) are seeing less of a recovery. The later could see revenues at -9% to -10% down in 2H 20.
- Management expects 2H 20 to be FCF positive (but lower than the EUR114m of 1H 20).
- Temporary measures that boosted working capital-related cash outflows, mainly tax deferrals and property lease deferrals, at around EUR31m. These will cause an outflow in 2H 20 as they are repaid.
- Capex for full year 2020 expect at around EUR200m, under the current trends of business activity.
- Secondary market disposals of used equipment slowed due to the shutdown of channels (ie auctioneers, etc.) and not due to a decline in buyer’s interest. Since the end of the lockdowns, activity in the secondary market has returned. Total secondary market disposals could come at EUR250-300m this year.
- Almost all staff who were put on furlough are now back to the company’s payroll. This is because many furlough schemes are winding down, while activity has recovered strongly, requiring workers to be back at work on a conventional basis.
- Impact of furlough schemes and other temporary measures on staff costs at around EUR25-30m in Q2 20. These will mostly go away as furlough schemes wind down.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano