HEMA - Buy to the sound of canons.

All,

Please refer to our updated analysis here.cThe agreement of the SSNs to what is essentially their own plan was only to be expected. The more interesting news yesterday lies in the detail of the Q1 report, some key figures of which had already been released.

We are therefore going long HEMA SSNs (subject to LUA) for 5% of NAV. At current prices we are essentially paying full price for the new SSNs and the PIKs and receive the equity for free. Naturally there will be some value in the equity and out of the gates the PIK should be trading below par and the SSNs above par. Our investment is predominantly short-term, but before the background of what should be a reasonable upside scenario. In particular we could imagine a scenario in which the company is sold this year or next within the M&A process currently run by Moelis. We could even see Ramphastos as a knight in shining armour, realising that this restructuring (without its own continued involvement) will have been the cheapest way to deleverage the company. In the auction, the firm would have an informational advantage.

Valuation:

Fundamentally, our trusted and now adjusted pre-Corona model suggests a plausible return to E70m EBITDA in 2021. That is not enough to deliver sustainable FCF coverage but we do not see retailers like HEMA as 5-6% EBITDA companies either - even post Corona. We think a return to E100m in the following year is entirely possible and that should also be sufficient to refinance. Given its strong cash conversion (of the admittedly low EBITDA), the company deserves a higher than average multiple, in particular when the new CLA is bedded down, promising some margin reprieve going forward. We have also not counted the strong cash position following the restructuring. 

Operations:

We note that the restructuring does nothing to improve the operating fundamentals of HEMA. Operationally, the main lever for the company, apart from asset light diversification, is the expiry of the horrendous CLA in December. But a shift to a more conservative CLA will take time to translate into margin. The Netherlands do not have a CVA mechanism and so the rent inflation is one area HEMA have yet to deal with. Perhaps the wider retail woes from Coronavirus lend a stage now.

Wolfgang