Emeria - This time next year
All,
Please find our updated analysis of Emeria here.
It is June, and the end of Q225 is less than a month away. If the WC outflow still represented a problem, we’d have heard of it now. It’s inflows from here. The company’s strong market position in France should allow it to hold on to the Phenix cost savings, and management are better than we thought at bringing down those non-recurring items and WC flows. We note that beyond the pre-meditated cost efficiency measures that go along with any roll-up strategy, the company has been making no effort to reduce expenses any further. Management is growth-focused, not cost-focused. Having done our math, we think the company can at the very least amend and extend this time next year. There is equity value and the sponsors have too many options at their disposal to get in trouble, including asset sales (Asurimo). If, in the end, an A&E requires fresh cash and the sponsors have none in the cellar, they’d be better off taking on a limited dilution from a third sponsor than taking their chances in Sauvegarde proceedings.
Investment Rationale:
- We are long the SUNs for 3.5% of NAV. The company looks set to preserve liquidity through its self-made crisis. The slightly disappointing operating performance in Q125 is more than offset by the stronger management of non-recurring items and working capital. The cost-cutting Phenix project remains on target for a strong margin uplift by year-end. The momentum should carry the refi.
- The precarious liquidity situation is home-made and so will be the solution. Fundamental developments aside (see next point), this battle will be won in-house with levers that management can control. Emeria is therefore not another bet on the economy, but an idiosyncratic name. Management is naturally growth-oriented, but so far, we concede that non-recurring costs are coming down as advertised.
- Fundamentally, the business is in reasonable shape, naturally moving with the cycle as B2C sales are more volatile and Lease Management is showing some softness in line with overall market conditions.
- When all goes to plan, the company remains very highly leveraged into the refinancing of its RCF beginning next year. The sponsors may have to inject some fresh cash to give a little cash incentive for an A&E and leave Emeria with a little more cash. We think €200m would be enough. This may be a very large sum for the sponsors, but in the scheme of their equity valuation, they should be able to attract a third party to dilute them, rather than risk losing the entire investment to creditors.
- In a Sauvegarde, the SUNs would not sit at the table. But their second biggest weakness, the small size, (the biggest being issued out of Luxembourg), is also their greatest defence. They are too small to risk the company for. The Sr. Sec. block would want a near-par package or send the sponsor back to Switzerland.
Key Insights:
- Emeria’s turnaround hinges on three levers: Revenues, and Non-Recurring Items; other components are largely stable, although concerns persist around negative underlying LfL trends (Model Section).
- Operational recovery is slower than expected, but execution of cost savings is ahead of plan. Liquidity should be sufficient from here despite expected further RCF drawdown in Q2 2025 (Update Section). Emeria should be able to hold on to its cost savings given its strong French market position (Model Section).
- Lease Management is underperforming, but French B2C and UK operations are outperforming, together creating a slightly adverse margin mix. Revenue is up ~3%, but Gross Profit is €10m below forecast. Partially offset by cost inflation, Phenix cost savings lift EBITDA to €6m/quarter below forecast (Model Section).
- Management, however, is ahead of plan on Non-Recurring Items, offsetting operating underperformance (Model Section).
- Assuming Emeria controls Non-Recurring Items, retains cost savings, and achieves steady growth—our valuation approaches 12x EBITDA, near Partner’s Group’s entry multiple of 13.5x (DCF Section).
- Base Case: We model 5% annual growth in 2027–28, reflecting a European macro recovery, then 2% long-term growth (DCF Section). On that basis, and with lower LTV, based on debt capacity, 6.5% average interest cost is feasible. A re-rating to 13.5x EBITDA would justify 6.5x average coupon costs (DCF Section).
- While there is upside to this scenario, a plausible downside case reveals overleverage of ~€400m. Yet with €1.5bn equity cushion on the line, sponsors should find an equity solution — internal or third-party — to protect their position. Using Sauvegarde Proceedings to impair €250m of SUNs would be poor judgment, capital-intensive, and risk loss of control (DCF Section).
- The RCF will require refinancing attention next year. A partial equity injection of, say, €200m should enable an amend-and-extend solution at lower cost than a full recap (DCF Section).
Factors Management don’t control:
- The French economy is not alone in struggling along this year. Mortgage Production has run out of steam before it really took off and we’ve had to adjust our expectations.
- The Lease Management division is far less volatile than B2C Sales, but with some delay, it is also displaying signs of weakness. We have no doubt that LfL growth has been negative, but are satisfied that this is a macro-induced trend.
- We don’t think these trends will drive the refinancing.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk