Atalian – maintaining position following Q3 20 results

All, 

Please find our updated analysis on Atalian here. 

Atalian’s Q3 20 EBITDA benefited from EUR21m of temporary furlough and wage support schemes. This accounted for 41% of the EBITDA generated during the period. Based on management’s statements, we estimate that the equivalent amount in Q2 20 was EUR10m positive, leaving 9m20 EBITDA EUR31m higher than otherwise would have been without these schemes. 

The benefit from these schemes was therefore substantially higher than the revenue impact on its contracts. This suggests that Atalian has used these schemes to obtain temporary relief from what is effectively an issue of structural overstaffing in the business. 

These structural issues of unprofitable contracts will remain even after covid goes away, as revenues return to more normal levels and the temporary schemes go away. This unwinds of the virus-related impacts on revenues and support should be very negative for the EBITDA and FCF of Atalian going into mid-late 2021. This is unlike most other companies, for whom a return to a post covid environment is desirable as most contracts are operated at a positive margin during normal times. 

Meanwhile, on the working capital side, the EUR47m of deferred tax and social charges will be flowing out of the business over the next 5 quarters, putting pressure on liquidity.  

Pre-covid revenues included a 24% exposure to Retail and 20% to Transport, sectors that are likely to see some permanent damage from the virus. In our projections, taking into account that the disposal of the Landscaping business already shaves around 5% off 2019 revenues, we project revenues and EBITDA returning to a more normalized position by mid-late 2021.  This would not return Atalian to a sustainable FCF and capital structure. And these projections are likely to be generous, as they assume an almost full recovery of revenues to pre-2019 levels excluding disposals.  

We maintain our short on the Atalian EUR2024 bonds for 4% of NAV. With the bonds already trading in the high 80s, for an 8-9% yield to maturity, we see limited further upside for the bonds. At these levels, they are already trading at their pre-coronavirus range. Unlike the bonds of Rekeep and CMA CGM, this has not been driven by structural sector and company-specific improvements since then.  

We also do not see much room for the kind of primary-market driven rally that benefitted CMA CGM. Atalian has no major maturities until 2023, and there is little incentive to replace any of its legacy relatively low coupon/margin bonds and facilities, as this would put further pressure on FCF sustainability via a higher interest bill.  

We see low recoveries for the bond, potentially into the 50s. because of the exhaustion of almost all forms of available collateral following the EUR50m state-backed PGE loan, which is structurally senior to the bonds. The company is still trying to upsize its recourse factoring facility by only EUR8m, which suggests the further available collateral on the receivables front is also limited. The bonds could initially decline to the 60s as the business returns to a more normal margin and working capital position at the end of Q1 21, thanks to the unwind of the government support measures. The UK wage support scheme has been extended to March 2021, though deferred taxes and charges will still have to be repaid as per the original plan. In any case, we find it difficult to believe that any potential owner of the business would not strip off the net positive impact from the virus schemes from the company’s valuation. 

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

Juliano