Modulaire (Algeco) – IPO plans and position
All,
Please refer to our unchanged analysis here.
The company’s confirmation it is exploring a potential IPO confirms our underlying thesis that following the acquisitions and divestitures in recent years the company has become more resilient to oil shock, would benefit from its exposure to construction and would therefore have enough liquidity to navigate the pandemic.
IPO is the best option:
Now that the liquidity trade gives way to a more medium-term outlook, the over-leveraged balance sheet needs addressing. We model that going forward Modulaire produces sustainable FCF (after leases) of E120m, which is simply too little to cover its E160m+ interest bill. But arguably that debt is too expensive and can in part be taken out in the IPO as the market would surely want a less leveraged proposition. Also, growth prospects are good, but they won’t be achieved without further Fleet CapEx or (more accretively) further acquisitions, i.e. the IPO also needs to afford the company additional cash if it isn’t to use its stock, only to dilute future shareholders’ earnings prospects.
EV of 5bn:
Press reports are taking the EBITDA (we forecast E350m this year and are multiplying that with the usual 15x. It is quite possible that in this market shares would be lapped up without looking at cash conversion, but the price tag would translate to an unlikely 50x EBITDA -CapEx (see above). Growth prospects may be good, but Modulaire are not an online company.
Still, Bloomberg reported yesterday that TDR hired Goldman Sachs and Morgan Stanley to advise on an IPO or sale, valuing it at an EV of EUR5bn. Clearly, either shareholders or creditors have it wrong.
Position:
We still have a long position on the USD8% 2023 bonds, which we entered on 4 Jun 20 and will be looking to exit those in time. We have been enjoying some 5 points upside and clipped a good coupon, but the bonds are now trading to call and for the ~8% running yield we are relying on the strength of the market to take us out one way or another.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano
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E: wfelix@sarria.co.uk
T: +44 203 744 7055