Rekeep - massaging the working capital
All,
Please find our updated model here.
We are trying to rearrange a call with Rekeep management, but in the meantime, we have updated our model for Q1 numbers. There is no change to our model from our previous and we remain comfortable with our 3% long position in the Rekeep Senior Secured Notes.
Investment Rationale:
- The bonds are up 5pts since we went long in February, tightening the yield to 11%. We do not anticipate any near-term event risk, and with positive momentum expected from Rekeep’s backlog coupled with the tailwind from reducing energy prices, we expect yields to remain in the 10-12% range in the coming quarters. We would seek to exit the name at c. 10% yield, (94%) price, not on any credit concern but see 10% as the top end for this credit.
- As previously commented, past indiscretions have always weighed on the name. Our model sees some modest increase in leverage in the coming quarters, depending on the overall impact of the reduction in energy prices. This may be offset by tax credits, which would delay the increase in leverage. Beyond FY23, we expect the Company to continue to deleverage.
Working Capital:
- Working Capital is the main operational issue with the Company. Rekeep manages its liquidity via recourse and non-recourse factoring.
- Non-recourse factoring is easy to justify, given the quasi-government status of Rekeep’s clients. The debtors' days are extraordinary high at nearly 6 months as per Rekeep’s numbers, which leads to the usage of non-recourse factoring. Rekeep usually factors about 5-7% of their revenue, so currently it is not a major concern.
- But the slow receipt from Rekeep’s customers, has led to a poor payable days performance. Rekeep payable days are also close to 6 months, albeit has reduced recently because of the change in terms of the energy suppliers. This has led to an increase in reverse factoring, to meet these tighter payment terms.
- The Company are open about the use of factoring and presents a slide regularly on debtor and creditor days. It remains a small credit concern for us and we would be sceptical if reverse factoring (on payables) increases any further.
- We await clarity from the Company, but we view the new reverse factoring facility of €60m to replace the existing reverse factoring currently used. The new facility will enable suppliers of Rekeep to receive payment earlier, with no change of terms to Rekeep.
Tax Credits:
- In Italy, a new law was introduced to compensate for the increase in energy prices concerning Q2 ’22 - Q1 23. Rekeep has received tax credits totalling €43.8 to March 23 with c. €1-2m in Q2 23. Tax credits can only be used to offset payments due to social security payments (employee income and withholding taxes).
- These tax credits have masked the slight underperformance in EBITDA progression during FY22. This is partly due to the inflationary pressure the energy prices have had on margins, coupled with lower-than-anticipated renewal rates in Q1 last year.
- Our model sees a modest increase in leverage for the next coming quarters, as energy prices abate. Top-line growth is not expected until the back of the year, which will lead to the resumption of deleveraging.
Q2 results are not due until the end of August.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk