Modulaire - Speaking Volumes
All,
Please find our new analysis, here.
Sarria | Modulaire - Live Discussion
Aengus MacMahon - Senior Analyst
Thursday, 8 May, 3 pm UK time | 10 am EST
Modulaire protected cash flow by cutting capex, and with assets that can last 25 years or more, it is a trick that they repeat whilst they wait for the market to improve. That said, the debt stack is stretching the balance sheet, and margins are still above the average over the last 10 years. In 2024, volumes fell, but price rises meant that profitability was preserved. Repeating this performance will be tough in 2025, and we will review where we expect the company to be at FYE 2025 after the Q1 results.
Investment Considerations:
- We do not have a position in the SSN or the SUN, but we expect the debt stack to widen after the Q1 25 results, which will reflect weakness in Modulaire’s markets in Q1.
- Our forecast is for more projects getting underway in H2, causing utilisation rates to stabilise and then improve. More projects beginning will also lead to an increase in the level of new unit sales. Based on this, our bias is towards a long position.
- However, if management gives no comfort on an improving trend in either or both of these metrics, we would consider a short.
- We are assuming that the €114m level in Q4 2024 is a realistic run rate for 2025.
- Since Q1 2021 Modulaire has generated an average of €115m a quarter from the sale of new units. The sales collapsed to €83m a quarter in the first three quarters of 2024 (before generating €114m in Q4). We are assuming that the €114m level in Q4 2024 is a realistic run rate for 2025.
- The 450bp pick up in spread from the €SSN to the €SUN is attractive and we would expect that to reduce, but not yet. There are around 3 points of upside and 5 of downside going into the Q1 results. The SSNs have at most 2 points of upside and 5 of downside going into the Q1 results season.
- Given our forecast and with €295m of liquidity, we do not see a near-term catalyst for distress at Modulaire.
- Also, the capital structure is sustainable but tight, and there are no significant maturities before June 2028. There is around 2x of value under the SSN (c1x SUN + c1x equity). The SSNs are likely to be money good with value breaking in the SUNs if there were a restructuring. We are not expecting Modulaire to become distressed.
- We expect Modulaire to cover interest from Free Cash Flow in 2025 and 2026, but it is a long way from 2.0x, and further improvement is needed.
Utilisation rates fell throughout 2024, but higher margins limited the damage:
- Underlying EBITDA was virtually flat despite an 8% drop in revenue (driven by a 300bp fall in Utilisation rates). Gross margins were boosted by price rises and increased sales of additional services. Increasing price in a weak market is something that cannot be repeated forever, and we expect some friction in slightly lower EBITDA in 2025, with an improvement in 2026.
- There will be concerns about margins coming under pressure, but Modulaire has the heft and the liquidity to ride out a tough 2025. Smaller competitors will be less able to use economies of scale to help with pricing.
- We expect utilisation rates to normalise and return to the mid-80% level.
- We forecast FCF/Interest at 1.2x in 2025, rising to 1.3x in 2026. Modulaire will keep capex low to achieve this. The company cut €70m from spending this year.
- We expect capex will rise back to around €200m this year and next, but the figure could be cut if utilisation rates do not bounce back. Annual Depreciation runs at around €370m, so capex will have to rise, but we have no concerns about the age of the fleet. At the time of the Brookfield buyout, the average age was 11 years for assets with a useful life of >25 years.
- We are not ignoring the risk of some structural overcapacity in the industry.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055