Rekeep - bobbing along - positioning
All,
Please find our updated model here.
Rekeep bonds have traded down 3pts on the back of their Q3 numbers. Although the Company had guided to weaker revenue (on the back of falling energy costs, reducing the pass-through) the numbers are weaker than we had expected. Tendering activity remains subdued due to the impact of new legislation, with the majority of contracts in the market renewals, instead of new markets.
Re-examing the model, we gain comfort from the reversal of working capital expected in Q4 and adjusting for the Saudi termination and tax credits, we feel comfortable with leverage ending FY24 below 5.0x, including the fine on our calculations. We include all factoring, off and on balance sheet, in our leverage stats. This is an increase on current levels, but FY23 figures are flattered by the impact of the tax credits.
Investment Rationale:
- We are increasing our 3% long to a 5% long position to take advantage of the working capital inflow expected in Q4. The business remains stable, and the Company maintains amble liquidity with limited debt ahead of the bonds, we continue to see value at current levels (13.5% YTM).
- Adjusting for the impact of tax credits and Saudi exit, we see a modest contraction of EBITDA from €115m in FY23 to €111m. We note that even from €100m of EBITDA, the business still generates c. €10m of FCF after interest.
- We acknowledge that given the relative size of the Company, any small movement has a large impact on overall profitability.
- Given the non-discretionary nature of its revenue and the quality of its customer base and order book, we would expect stability from the name in the coming quarters.
Downside:
- Our main concern with Rekeep is the lack of revenue growth since they did the refinancing in February 2021. Excluding the impact of tax credits, EBITDA has declined from c. €110-120m range to €100-110m for FY23-FY25. With the closure of the Saudi operations, there is no major step change growth factors which will impact on top line.
- Polish operations are showing some sign of growth, and with recent CAPEX spend on cook and chill facilities for hospital catering, further growth can be expected. Unfortunately, in conversations with management it doesn’t appear to be a major contributor and we EBITDA projections is still range bound.
- At €100m EBITDA, less €40m CAPEX and €45m Interest, and €5m taxes, there is no real deleveraging.
Tax Credits and Impact of Saudi exit:
- Headline numbers of Revenue & EBITDA growth are heavily impacted by historic tax credits received as compensation for the impact of the energy crisis in Italy. These tax credits, which were used to offset social security payments, have inflated revenue and EBITDA number, and subsequently artificially reduced leverage.
- All things being equal, the end of these tax credits, In August 2023, has the impact of reducing EBITDA and increasing leverage.
- Additionally, the costs associated with the closure of the Saudi operations, c. €8m for Q3, has also impacted EBITDA, distorting the comparison to prior quarters.
Order Book hiatus:
- Investors have raised concerns on the reducing Backlog/Revenue ratio, which has fallen from over 3x to 2.2x in Q2. It has marginally improved in Q3, albeit driven by the lower revenue numbers (which are impacted by the lower energy prices). However, the contracts are accounted for under historical tender values, not including inflationary adjustments, versus revenue which is inflationary adjusted. Also influencing the ratio the cancelled contract which was awarded to Rekeep in Q4 last year but had to be cancelled as the tendering entity had not followed the correct procedure.
- A bigger unknown is the impact of the Italian code of public tenders, which was released in July 2023. This has definitely delayed the overall process, which tendering entities preferring to wait until the legislation was published before launching new tenders. Therefore, recent activity has seen an uptick in renewals of contracts, usually for a 1yr period instead of full blown tenders.
Factoring Facilities:
- Rekeep uses a significant amount of both on and off-balance sheet factoring. We include all recourse factoring (both on and off) in our leverage numbers.
- In line with our expectations, we are noticing a change in the make-up of Rekeep’s financing. With financing rates increasing, Rekeep have lowered their non-recourse financing by c.€40m since Dec 22. In addition, there was a €15m reduction in recourse and reverse factoring. In total, this is c.€55m of cash used.
- New Borrowings total €100m This was funded by the drawdown of their new €60m credit line, and €40m in other borrowings.
- We expect cash balances to increase by c. €40m in Q4, on the back of working capital inflow. What is visible is the reduction in non-recourse factoring which has expanded overall on balance sheet working capital.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk