Intrum - Of Muddy Waters, Melting Icebergs and Clear Views

All,cPlease refer to our unchanged analysis here.

The shorts are out again on Intrum. After Muddy Waters disclosed a short position in the name, other usual suspects like Oceanwood, Atom, Marshall Wace and Lansdowne have jumped on the bandwagon as well. 

From our analysis of the name we find no reason whatsoever to short Intrum here, except perhaps some technicals around credit ratings etc. and we are not sure of those either. We continue to be very critical of much of the accounting shell games debt purchasers are playing and the continuous negative cashflow at most peers is a concern. We are also aware of and won’t want to stand in front of the large short community when it decides to short debt collectors again. But Intrum is the best in class.

- Strength: The company has ample liquidity for longer than anyone can stay short and it can generate more by investing less into its book. Clearly that would melt the iceberg and despite a short-term pick-up in profitability that would be detrimental, but given the company has achieved the unique status of being the first and only European debt collector that is NCF neutral (thanks to Intrum’s large 3PC business and unique funding). 

- Weakness: Intrum’s cost structure is practically entirely fixed - employees, phone lines, IT, rent…. So the business would add SEK 1.2bn in debt if it had to pay all its expenses for a month and receive no income at all. But this is not how it works. While some income will have to be rescheduled / renegotiated, the vast majority will still be coming in. So there will be some leveraging effect,  but it will be minimal relatively to the overall pile. 

- Threat: Intrum’s access to cheap Swedish funding could dry up. However, we see no reason for this in the foreseeable future.

- Threat: That Intrum have to take a write-down is likely. But lower for longer Interest rates and a growing opportunity in the 3PC business will likely offset that in the medium term. Until then there is only cash, more cash and not a trigger in sight. 

So Intrum stays on our target list of "names we like for the day risk goes back on" - now even more so. Thank you Muddy Waters.

Wolfgang