Atalian – time on its side, for now.
All,
Please find our updated analysis on La Financiere Atalian here.
Atalian has navigated through the post pandemic period with very little fanfare but with better Q2 numbers than we expected. We now see little prospect of a company specific correction in the price of the SUNs, so will not be looking to short them currently. The company has plenty of liquidity and with factoring lines extended and increased there are no short-term concerns. The promised equity raise of €200m - €300m remains important to refinancing the 2024/25 bond maturities, as without debt reduction, Atalian’s FCF will only just cover interest.
Risky business:
- Recurring FCF has improved from being outright negative to being only about flat. Going forward however, upside and downside seem broadly balanced.
- Atalian’s management team has shunned M&A since the expensive Servest acquisition in 2018, with a promise to focus on cost containment and tender management. Post pandemic, contract renewals are going to see pricing pressure from clients, particularly for low-value cleaning services. However, some of the higher-margin Covid business will persist and management claim progress on cost-cutting. We expect margins in the 6.5% range (pre-IFRS 16).
- Atalian France has come back quickly to pre-pandemic levels, the UK business is now also recovering post the Q1 lockdown and whilst International is taking more time, due to Asian lockdowns, the environment is improving there too.
- At some point, the company will return to M&A, however its leverage rules that out for now.
Equity Raise, when and from whom?
- Atalian has promised to source €200m - €300m in equity by the end of 2022. Since it was first moted in November 2018 there has been no obvious progress. Without the additional cash, however, Atalian will need to work hard on improving FCF /Interest and persuade investors to keep backing the company.
- The Franck family are not going to be in a hurry to sell until EBITDA and/or multiples are sufficient to minimise dilution. We also don’t expect investors to begin to worry until the FY2021 numbers are out. A formal extension of the deadline for the raise to 2023 wouldn’t faze us too much.
- Partnering up with a private equity investor seems the most realistic prospect although this will require realistic discussions overvaluation multiples. When Atalian bought Servest the pre synergy multiple was 12.2x falling to 8.8x once synergies were considered. ISS currently at >12x 2021 expected EBITDA. 10x our 2022 forecast would value the equity current equity at €322m, implying a 40% dilution for the family.
- Another option might be to sell one of the divisions. Retrenching would hurt family pride but would maintain full control. As the margins in France are the highest for the group, other divisions may be sold more accretively.
Massaging the figures:
- Since Q119 Atalian has flattered its OCF with increased use of factoring by €150m (with a further €60m in undrawn lines). We have backed this out of our working capital calculations and moved it to debt.
- IFRS 16 increased Atalian’s EBITDA by over €30m p.a.; we have run our model on a pre-IFRS 16 basis.
- Atalian has a concept of strict and non-strict working capital. The latter contains what we consider net deferred liabilities from covid support and tax deferrals. There will be outflows in these accounts in the next two quarters, but much of the ~€150m of NWC gains (excluding factoring), which the company achieved in the last two years, is unlikely to reverse.
Positioning:
- We will not be putting on another short in the Atalian SUNs at this time as we have been unable to sufficiently confirm our short thesis and for lack of any significant near-term catalyst.
- Notwithstanding this, Atalian remains a high beta name (the SUNs traded in the 70's pre-Covid). In the event of a general market retreat, Atalian could be a reasonable short, given its limited upside.
- The main upside risk stems from the €200m - €300m equity raise promised by end of 2022. Given the pandemic, investors have not demanded progress, but without a positive update by March (FY2021 results announcement) investor impatience could run thin and that may be a better time to enter into a short.
Happy to exchange ideas and discuss
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055
www.sarria.co.uk