Atalian – maintaining position
All,
With respect to the temporary boost of margins and understated leverage, the call reflected similar themes that we have observed in other companies’ quarterlies this year.
We are short the EUR 2024 bonds for 4% of NAV. At this point, the rationale for the short remains, as the temporary positive margins impact and working capital impact will go away over the next few quarters. We will update our Q2 and Q3 numbers and assumption over the next few days, after taking a closer look at the cash impact of the recent changes in working capital deferrals and EBITDA cash conversion, in the context of the more precise EBITDA impact of the temporary support measures.
These Q3 20 numbers were on a similar trend to Q2 20 – revenue declines offset by margin expansion from temporary furlough and wage support measure.
As discussed in our previous update, Q2 20 numbers had shown an outsized impact from the temporary support schemes, which more than offset the significant revenue contraction over that period. Therefore, the Q3 20 numbers were largely in line with our expectations.
The bonds weakened slightly after the numbers came out, in line with the overall High Yield market.
EBITDA: Considering the EUR21m impact from furlough and temporary wage schemes in Q3 20 alone, the company’s EBITDA for the last 6 months of reported EUR114m was largely in line with our initial forecasts of EUR65m. With the unwind of these temporary measures, we see Atalian’s cost base as unsustainable going forward, in the absence of structural changes.
Liquidity: EUR47m remaining to be repaid under the deferred tax and social charges, which were postponed from Q1 and Q2 20. EUR38m of that is in the UK, which will be rescheduled over several quarter until 2022, and EUR10m will fall in Q4 20. The remainder is in France and it has been fully repaid. This inflates the cash balance of EUR188m and flatters the company’ leverage by 0.3x.
With some of these schemes, notably the important UK scheme, going away, we are likely to see EBITDA tracking the revenue decline more closely over the next few quarters.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano
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