Atalian - Show me the money
All,
Please find our model on Atalian here.
- After plenty of digging it's time to act. Atalian retains a long list of challenges to overcome, while many aspects of the credit remain of serious concern to us.
- We are moving to a 4% short position on the Atalian EUR2024 bonds. At the current levels of 75.5 (YTM12.7%) and based on the forthcoming events (competitor news flow), we see around 7 points of likely upside for the bond price. Considering the coupon and borrow costs, we estimate a 10% risk for the short position over the coming two months. On the downside, we estimate that the bonds could well move to the low 60s, which would be closer to our estimate of current fair value, but more importantly is closer to the bond’s security coverage and a level only recently explored. It is unlikely but not impossible that the bonds could even go as low as 50, though that would require more meaningful bad news from the company itself. We see the next Sodexo results (likely around 8 Jul), ISS results (scheduled for 12 Aug) and Atalian (likely around 29-31 Aug), as potential triggers for the repricing.
- The results of Rekeep (scheduled 27 Aug) may support Atalian's bond prices, as we expect it to show continued resiliency. There is a risk that investors do not fully appreciate the significant difference between Rekeep's underlying exposure - mainly public sector and healthcare - and Atalian's - mainly large private corporations.
- We estimate that Atalian's current debt structure is not fully covered either on a EV/EBITDA multiples basis (6-6.5x) or on a FCF basis.
- We do not see the current bond levels as attractive, given the company's significant legacy problems, the lack of a clearly demonstrated ability to generate FCF after interest, the trading history of the bonds, and the vulnerable stage of its turnaround program. Because of the significant exposure of Atalian to highly cyclical private sector activities, the coronavirus will have a significant impact on both short and medium term results. Finally, we see both disposals and a capital increase difficult to execute in the current environment. In any case, a capital increase would not be possible until a clear equity cushion is demonstrated, which will only be achievable once Atalian returns to consistent FCF generation post interest.
- As a mitigant, we estimate that Q2 20 results will contain several temporary effects, some of which could work to the company's advantage, including further postponement of payments to the government and even some suppliers, temporary staff cost reduction measures, and other. This will cloud the picture in terms of margins for at least the next two quarterly results, and these movements could also be "sold" by management as partly driven by its own turnaround initiatives.
We are looking forward to exchanging ideas on Atalian with you.
Juliano