Atalian - Balancing the desire
All,
Find our updated analysis here.
Atalian’s recent operating performance was less important than news on how it is coping with inflationary pressure and when it will deliver its capital increase. Management hopes to start the capital raise process along with the FY21 results announcement, which will be around the beginning of April. The size is not yet finalised. The family will want to minimise dilution and we can see the timing slipping. As for costs, higher staffing costs are being passed on, but the company has found attracting staff difficult. Costs are therefore likely to rise, and margins will be pressurised as “pass-through” is tested. Atalian wants “sell” the 2021 results for the capital raise, so the company is clearly very confident in the FY numbers. A possible blip could be COP26, Atalian is providing security for the event and as G4S found at the London Olympics this is a possible high-profile blip.
Capital raise timing firming up:
- After initially guiding for 2022, management narrowed its window for getting the capital raise launched. It is now expected to be launched by early April 2022. Although the completion of the process and the size are not yet determined.
- Management would not have given more specific guidance on the raise if they weren’t already a long way down the planning road. They are a hostage to fortune for any bumps in the road, but we are in November, so a sudden disaster in the core business is not likely.
- The COP26 contract is only worth £14m, however, any high-profile issues could reverberate well beyond the revenue generated.
Higher costs being passed on:
- The primary cost is staff and Atalian says that it has been able to pass on higher staff costs. However, it also admitted that in certain areas staff were harder to hire. Higher costs are clearly coming as staff numbers are required to rise back to original levels to match contract commitment levels. The tough conversations over costs are not yet over.
- Management guides for a margin of 7.5% in 2021 and 8%+ in 2022 as benefits from cost cuts flow through. We calculate margin on a pre-IFRS 16 basis which is c120bp lower. We agree with the 2021 target, however, we expect the 8%+ (6.8% pre IFRS16) in 2022 will not be achieved. Even with continued Capex discipline this will leave Atalian barely covering Interest from Free cash flow.
- Atalian has significant liquidity. €154m in cash on balance sheet and an Undrawn RCF of €103m. The company has a significant runway if there are temporary cost pass-through issues. The next significant maturity is the 4% EUR625m SUN.
Investment Considerations:
-We would prefer to be short Atalian as a name, however, the near-term catalysts are to the upside. The promise of a capital raise and the slightly firmer guidance around timing will support all the company’s bonds through into 2022.
- The management teams need to continue margin improvements to ensure Free cash Flow covers interest. The balance sheet is overlevered.
- To ensure the 2025/2026 maturities are refinancable, leverage needs to be reduced. This will need to be balanced by management’s desire to return to acquisitions.
Looking forward to exchanging ideas with you all on this
Aengus
Private security firm lands £14m COP26 contract as police warn of costs | The Scotsman