Cerba - Testing our Patience - Positioning
Dear All,
Please find our updated model and positioning on Cerba, here.
After listening to the Q4 2024 earnings call, we have the following observations: The trajectory of the Q4 2023 results was a continuation of the Q3 2023 results which were sub-optimal in the first place. Our view that it will take time for Cerba to lap the inflated revenues from Covid-19 and win new contracts from the Research Division is playing out and we expect more of that in the coming quarter. Therefore the business is not benefiting from operating leverage. It needs to maintain capex at 4.5% of revenues to update IT systems in the Research Division. While management is implementing synergies and cost cuts in 2024 and 2025, margins will remain below its target of 25% and net leverage at 10.6x.
Investment Rationale
We are increasing our short exposure in Cerba by shorting the 2028 Senior Secured Notes as well as keeping our short position in the 2029 Senior Notes:
· 2029 Notes: Given the disappointing Q4 2023 results, we are maintaining our short position at 3% of NAV as we see no fundamental improvement & deleveraging in the coming quarters in 2024. We feel that the notes could fall to 50s as market participants see this as a recovery rather than a yield play and expect weakness in results will continue.
· 2028 Notes: We would also take a short position with a target price of 70 (yield of 14%) at 3% of NAV as there will be no positive catalyst and deleveraging event in the H1 2024. The bonds are vulnerable to a ratings downgrade (currently at B-) and the company admitted on the call about a difference of opinion with the rating agencies. Given the high probability of a ratings downgrade, we expect more sellers going forward adding to a deteriorating fundamental story.
Current Trading - Q4 2023
· Q4 2023 revenues were €482 million. Y-o-Y sales decline of 17% due to decreased CovId-19 testing revenues and below our estimates of €516 million.
· Positive growth in the Medical Lab business with a 3% increase offsetting a price decrease of 5.3% in France. Volumes grew by 8% in France which was above our expectations.
· Q4 2023 EBITDA was €106 million (declined by 32.2%) with EBITDA margins declining from 27% to 22% due to dilutive impact of integrated companies & margin contraction in the Research division. This was below our expectations of €124 million.
· Synergies expected to be €51 million in 2024 and €38 million in 2025 with 70% coming from the French Routine Lab business weighted equally over the quarters. This was in line with our expectations but not enough when taken in relation to the large debt stack.
Housekeeping
The next catalyst on this name will be the full reporting of the Q1 2024 financial results over the summer which may prompt a reaction to the trading levels of the bonds and our views. Given the tough comparables in the sector from the Covid period, we doubt we will see progress around the organic volume growth that would offset the tariff cuts, synergies, new contract wins in the Research division and a build-up of the cash balance that would lead to a material deleveraging.
Happy to discuss at your convenience.
Saahil
T: +44 203 192 0200
www.sarria.co.uk