Rekeep – increasing our position
All,
Please find our updated analysis on Rekeep here.
The FM4 fine, which had previously been enforced against the company at a total of EUR91.6m over 72 monthly instalments, are being recalculated down by the Italian competition authority under new parameters set by the TAR Lazio court. In our view, this will more than offset the impact of the Santobono case, where a EUR10m fine and a potential 6-month suspension on tenders worth EUR7m of EBITDA could result. Rekeep would be FCF positive after interest even in the worst-case scenario of both cases.
We are increasing our long position on the Rekeep bonds from 4% to 6% of the NAV, at the current price of 100 (YTW 9%).
We are currently in an environment of growing investor concerns about the impact of the second wave of covid-related lockdowns. Rekeep’s heavy concentration into public sector services and healthcare contracts should continue to be treated as a “safe haven” in the context of other more affected sectors. The revenue contraction in revenues in Q2 20, which was accompanied by an increase in EBITDA, was due to the expiration of an onerous contract and does not reflect any meaningful weakness in its overall business.
The high coupon also affords meaningful protection to the bond prices, even in a significant deterioration of the market environment. The company’s EUR117m of liquidity reserves should also continue to reassure high yield investors. Rekeep’s leverage is relatively low at 3.3x, even after adding back factoring lines. Other services peers have usually traded at around 6-7x EV/EBITDA.
1 - On the upside, in addition to the 9% coupon, we could see bond buybacks supporting the bond prices, while a potential new bond issue, coming after the Santobono case is clarified, could lead to a take out at the current call price of 104.5 or at the next call price of 102.25 (from 15 Jun 21).
2- On the downside, a negative interpretation of the conclusion of the Santobono appeal, currently expected by the end of 2020, could lead to a 3 to 6 points weakness in the bonds, which Rekeep would likely see as an opportunity to buy back bonds, as they have done in the past. Considering the past medium term path of this bond and the previous Manutencoop/Rekeep bond in similar cases, investors would likely bid the bond back over time unless they have reasons to believe that cash flow or valuation coverage is no longer enough.
3- Further downside is possible if further legal cases materialize. We see this as unlikely but of course not impossible in a sector as dependent on large tenders as services. We note that no new legal cases have materialized since the new management implemented a new compliance and risk control protocols. The new management has been in place since Feb 2018.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano
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E: jtorii@sarria.co.uk
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