Naviera Armas - Narrow as the Strait
All,
Please find our updated analysis here.
Having participated in the restructuring we are very happy with the result. But while the company regained shipshape, the sea has become rougher. Bunker prices have risen substantially and the strait is closed to passengers, even as King Philippe has publicly acknowledged Morocco’s interest in West Sahara. So cash flow has been lagging forecasts. Nevertheless, authorities are expecting a super summer, particularly in the Strait. So what do we make of the latest liquidity forecasts and what is the outlook from here?
Restructuring and sale of Trasmed:
- The company has finally restructured and the main assets surrounding Trasmed have been sold to Grimaldi of Italy, along with five ships.
- Naviera Armas continue to receive some collections for Trasmed as the Barcelona concession remains within Naviera Armas and subject to a commercial agreement.
- Naviera Armas, therefore, is back to serving the Canaries and the Strait, still holding the Trasmed subsidiary, but no longer exposed to the ruinous trade in the Balearic Islands.
- Having bought Trasmed for €420m from Acciona in 2017, the company received a good price of €300m, keeping some of the boats in the process.
- As a result of the transaction and the debt/equity swap NA is now substantially less leveraged and (still) more liquid.
Bunker prices:
- Bunker prices typically account for up to 1/4 of sales, but in March 22 alone have risen by another 1/4, to put what could be a €10m/quarter headwind on the company in the short term.
- Usually, we would be concerned about that, but in this case, we think that the company can pass those costs on. The petrol-guzzling fast cats of Fred Olsen should be at least as hard hit.
Closed Strait:
- Passenger traffic in the Strait is one of NA’s large segments, but the company has had to trade without it since Morocco and Spain closed borders, having fallen out over Spain’s hosting of an Algerian politician/activist pursuing the independence of 1975 annexed Western Sahara. Spain has since moved to verbally recognise the annexation, but apparently, Morocco want additional commitment.
- The general expectation is that relations thaw in the next weeks and the borders open again. Authorities are then expecting a Super Summer as relatives and migrant workers have been unable to cross the Strait for two years.
Liquidity:
- Oh well. So we were supposed to lie around €50m now and growing, but instead are losing cash at present. Some of that should reverse with reopening of the Strait and in any event, NA is a seasonal business with most cash flow coming in the summer.
- On current forecasts, however, cash should become tight (approach the (only) covenant of €10m minimum liquidity) still before summer, needing some addressing. We think a mild WC stretch should probably do it before cash comes in this summer and - if it really turns out to be a Super Summer - we should have little to worry about from there.
- Should a WC stretch not be sufficient, the documentation foresees a €100m s.s. basket, but that would send negative signals. Bonds certainly would not be invited to participate as equitable subordination risk would be too great.
- Adding to the pain somewhat is the fact that the factoring banks do not like to extend the full facilities currently and try to limit themselves to factoring only the state subsidy part of the bills. That is restricting liquidity even further.
Positioning:
- We remain long the bonds and shares post-restructuring as we consider both, the situation in the Strait and the spike in bunker prices temporary. Island traffic and traffic in the Strait are heavily subsidised by both Spain and the Canary Islands. Thus with the state on the hook in the first place, and lack of transport not being an option, we think that to the extent inflation does not already provide for passing on those increased bunker costs the state will.
- Liquidity is as narrow as the Strait, but we expect more liquidity on the other side of summer.
- With the new and highly reputed management and strict cash planning in place, we see NA returning to strength and expect to recover at least par as measured under the old bonds.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003