Cerba - Living in denial.
All,
Please find our updated model reflecting Q1 results here.
The release of Q1 numbers has not altered our fundamental view on Cerba. While the results were broadly uneventful, we were surprised by the absence of any further commentary on the “ambitious” cost savings plan highlighted during the FY24 results. Nothing from the earnings call challenged our short thesis. If anything, the additional detail disclosed on the Consumer Biology segment reinforces our conviction. This is a brief update, as we wrote extensively before the release.
Investment Rationale:
- We are maintaining our 4% short position on Cerba’s senior bonds at 75%. The brief post-results rally appeared to be driven more by the Colisée equity injection by EQT (a common sponsor) than by fundamentals. The company further utilised its RCF, and we had expected it to say it had drawn the remainder in Q2. Management declined to comment on Q2 liquidity, and we remain confident that further RCF drawdowns will be necessary to preserve liquidity.
- Following the publication of our earlier note, some clients questioned our short stance, given that our DCF model previously showed coverage for the bonds. However, the slight underperformance in Q1 (versus our expectations) now results in a DCF valuation of 10.1x, down from 10.8x, which implies the senior bonds are no longer covered. Even under a theoretical coverage scenario, the company’s FY26 debt capacity, assuming a 1.5x FCCR and 8% coupon, suggests that only c.45% of the capital structure could be reinstated as debt.
- We recognise that senior credit investors are currently acquiring the bonds at a discount, effectively creating the business at 8.7x. However, the lack of debt capacity implies that some portion of the senior debt will be written off. It is overly optimistic to assume that 100% of equity value will accrue to creditors.
Key Takeaways from Q1 Results:
- While we remain negative on the name, we were surprised by the decline in volumes within the French Consumer Biology segment. The company presented a chart comparing tariff evolution to LTM sales (excluding COVID testing), which implies a 4.4% sequential decline in volumes. While the business is subject to seasonality (Q1 volumes declined 3.9% and 1.0% in prior years), adjusting our model to reflect this trend would further reduce our growth assumptions. We have reached out to the company for clarification on this point.
- A second notable takeaway was management’s lack of acknowledgement regarding the company’s current challenges. While the ongoing CEO search may partially explain this, we continue to believe management is fully aware of its fiduciary responsibilities.
Please don’t hesitate to reach out for further discussion.
Tomás
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk