Europcar - Leverage, Fresh Cash, Outlook, Valuation

All,

Please refer to our unchanged analysis here.

Leverage:

- If Europcar returned to leverage stats of 2015, as alluded to more than once on the call, then the corporate level would require a write-down equivalent to the size of the holdco notes and have E200m excess cash as of now. The Fleet level would need fresh cash of E130m and a debt reduction of approx. E420m - a E550m recapitalisation at fleet level, or a net E350m consolidated.

- However, given the uncertainties lying ahead, it may be wise to leave some excess cash outstanding at Holdco and thus asking for more cash to fund the transformation of the business and achieve a roll-over of the Fleet RCF and other asset-backed financings its possible the company might end up asking for the whole E550m.

Outlook:

- The presentation outlined a plan to return to 2019 P.F. EBITDA levels (low) by 2022 and only a return to 2018 P.F. EBITDA in 2023 (involving 2019-like Revenue and Gross Margin, but lower fixed costs).

- As of Sept. 30th the company retained significantly better liquidity than we had assumed, having materially outperformed our Q3 revenue expectations and having managed fleet size even more stringently. We expect the company to have a reasonable window now during which to address its capital structure before it must order new cars in spring.

- The company wishes to return leverage multiples to pre-IPO levels (2015). 

Q3 Historicals:

- Operating: Q3 Revenues have significantly exceeded our expectations by a near 200m. 

- Fleet: In Q3, Europcar achieved a larger than modelled fleet reduction and therefore a utilisation rate exceeding 70%. 

- Therefore fleet operating costs were E50m lower than we had dared to assume, mostly offset by lower staff and HQ savings.

- Corporate EBITDA and cashflows were therefore significantly stronger than feared, but conversely fleet cashflow did not result in any material inflow, remaining neutral in Q3 after reducing the intercompany position of "FCT Junior Notes, accrued interest not yet due, capitalised financing costs" by E60m - apparently upstreaming value to corporate. The notion of upstreaming value however appeared foreign to management when I asked on the call.

-> The company, therefore, retains a significantly stronger cash balance at corporate level than we had modelled and no longer looks like it needs fresh cash in the immediate short term.

Valuation thoughts:

- In 2015 the company had a market cap of E850m+. 

- Holding all else equal, the bonds trading at 45c/E and the potential fresh cash demand could approximately equal that number. 

- Depending on how coercive the deal for fresh cash needs to be, at least by this metric the current bonds may be exchanged for approx. 33% to 45% of the company if the RCF is exchanged for new debt.

Pros and Cons:

- Pro: In this low-interest rate environment the same company would be worth more in 2023 than it was in 2015, a return not factored into the above valuation calculation.

- Con: The equity would be held by unnatural holders and will probably not trade well, if at all.

Wolfgang

________________________

E: wfelix@sarria.co.uk
T: +44 203 744 7003

www.sarria.co.uk

Wolfgang FelixEUROPCAR