Atalian - Q2 20 results and comments
All,
Neither temporarily borrowing from the government via tax deferrals, nor crisis-related wage support schemes, represent permanent creation of Enterprise Value or EBITDA. The question remains how much of the revenue destruction will be permanent, and how much permanent restructuring efforts can Atalian implement to offset this downsize of the business. With the capital structure unsustainable before the coronavirus crisis, and Atalian significant revenue exposure to sectors likely to suffer some permanent damage from the virus – 24% Retail, 20% Transport – we see more downside than upside risks at the current levels of the bonds. Continued execution of the plan presented in January will be key.
With the revenue contraction at around -17%, not very different from what was previously guided by peers for Q2 20, the main surprise was the size of the temporary measures. Improvements in working capital are due to “non strict working capital” of EUR92m, which are mainly deferral of taxes and other labor charges to the government. It was also supported by a EUR17m drawing under the non-recourse factoring facility, which flows to the cash flow via operating cash flows and not financing. The opex reductions are mainly due to furlough and other crisis specific temporary schemes. For both items, Atalian has benefitted more than most companies due to the labor-intensive nature of its operations and possibly pre-crisis overstaffing in certain contracts.
For High Yield companies with a significant liquidity cushion, as it has been the case for Atalian, investors have rightly been more focused on what the financials could look like in 2021 or 2022 than for Q2 or Q3 20. The next few quarters will have significant positive and negative noise on furlough schemes, tax deferrals, rent deferrals, late supplier payments, offsetting emergency demand, and other temporary drivers.
Key takeaways:
- Revenue contraction 16.9% yoy in Q2 20 ( -12.1% at constant perimeter).
- Reported EBITDA (ie post IFRS 16) at around EUR54.2m, +6.7% yoy (+15.8% lfl), with margin rising from 6.7% to 8.5% during the period.
- Reported net debt/EBITDA post IFRS 16 down to 5.5x in June from 6.5x in December. Note that this includes the inflow from “non strict working capital” and the IFRS16 lease liabilities, and excludes non-recourse factoring and Payroll Tax Prefinancing.
- Cash flow generation of around EUR4m after stripping out working capital variations.
- Direction of turnaround plan unchanged from the January Capital Markets Day. Management is more cautious on execution, given the current macroeconomic environment.
- Temporary furlough schemes significantly boosted margins as they were applied to head office staff, and also used to temporarily rightsize staff on contracts previously overstaffed. Management sees “a few basis points” of EBITDA margin improvement as being structural in Q2 20, with the remainder of the 180bp being due to these temporary factors. It expects margins to trend back to more normal levels as activity returns to normal.
- Gradual improvement of revenues from the April lows to June, by 30% in France, 10% in Central Europe and zero in the UK. June revenues were still down on a yoy basis, however. Management has seen further improvement in July, but prefers not to go into details.
- Management sees a potential EUR20-30m increase in the factoring lines, mainly on recourse factoring.
- the CFO sees multiples as too low in the current environment for further asset disposals. At the same time, cautious on new acquisition opportunities due to desire to deleverage. Notes that disposals were a small part of the original deleveraging plan.
- Retail and Transportation still heavily impacted, but also with significant variations across geographies, depending on the speed of the reopening of restaurants, shops and airports.
- EUR120m of deferred taxes to be repaid over the next few quarters – roughly 70m in Q3, 30m in Q4 and remainder in 2021.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano