Rekeep - Revisiting the name - Positioning
All,
Please find our updated analysis on Rekeep after its FY24 results here.
The recent market dislocation has led to the bonds falling 5pts, yielding 10.6%, and it is worth a revisit. Rekeep is not impacted by tariffs and is low beta to the market. There are no liquidity concerns post the refinancing in February. Rekeep was able to secure the refinancing by offering additional creditor protection and an OID which left the yield at c.10%. The complete audited numbers have not been released yet, we are comfortable with the information offered via the presentation coupled with the investor updates at the time of the bonds.
Investment Rationale:
- Our previous 5% long position in Rekeep was taken out via the refinancing in February. We are now re-entering the trade, taking a 6% long position in Rekeep's new 9% Aug-2029 bonds at 95%. These bonds were issued at 97.5% and quickly traded up to par. We view current levels as an attractive entry price, and Rekeep's business plan is insulated from any tariff wars.
- The documentation was tightened significantly, with the new bond offering some additional protections for the deal to succeed.
- The Polish business continues to provide upside to the bonds, which is reflected in the increasing cost of the put option.
- However, the flip side is that the Italian business appears to be stagnating. Contract acquisition (deemed Commercial performance by the Company) underperformed in FY24 versus FY22 and FY23. This is partially explained by a new Italian law that required additional requirements for entities to issue, review and award tenders, creating a backlog of tenders. The company expect some large tenders to materialise in the near term.
- Working Capital has reduced from the 2023 hiatus caused by energy prices, and although only partially recovered in FY24, further improvement is expected in FY25.
Potential Asset Sale:
- In late 2024, Rekeep initiated a process to sell its energy management business to deleverage and assist its efforts to refinance its outstanding bonds. Rekeep has subsequently carved out the business into a separate entity called Teckal.
- Rekeep management was eventually able to achieve a refinancing without selling this business, but the bond documentation reflects the potential for this asset sale. There is a new redemption condition within the bonds that any proceeds greater than €15m for asset sales must be used for debt repayment, firstly for the RCF, and subsequently the bonds, at 103%.
- We remain cautious that the asset sale is probable, as we would expect it to be difficult to separate the energy management from its core business.
- However, press speculation reports that Rekeep is in exclusive talks to sell the business, with a price range of c.€250-300m.
Recent Results:
- Revenue increased by 6%, driven mainly by sustained growth in the Polish business. This translated into a nearly 20% increase in EBITDA, with the Polish business supported by the Italian business in Q4.
- Worryingly, the backlog/revenue ratio is reducing due to an increase in the backlog of outstanding tenders. Management expects the trend to reverse in FY25 but management had previously expected this to be visible in Q4’24. This will be a key point going forward.
- The strength of the Polish business is reflected in the increased cost of the Polish Put Option. This is the potential cost to Rekeep to buy out the minority shareholders at Rekeep Poland. The value of the option has increased driven by stronger business plan for the business. Management expects EBITDA to double over the next four years in Poland. The potential cost of acquiring the minority shareholders in the Polish business has increased from €38m to €53m, which is based on the higher profitability. The €53m Put Option is included in our leverage stats as we fully consolidate the Polish business. It is 0.4x of additional leverage with the option exercisable during 2028.
- Note Q4 revenue includes the Saudi settlement and has impacts across the P&L. It did not impact cash flow as the settlement was not received until January. It should also be noted the Company is aware of this impact, and present the numbers, as we do, excluding the settlement. All of the above statements are excluding the settlement.
New Legal protections:
- As per above, the new bond documentation offers additional protections beyond the previous deal, including the previously mentioned conditions surrounding asset disposal.
- The documentation appears to have tightened the language surrounding the potential for dividends. The restricted Payments covenant was tightened, with a threshold of 2.x Consolidated Net Leverage Ratio requirement. The dividends basket following an IPO is no longer in the bond documentation.
- Apart from the specific receivable facility Rekeep has, no other borrowings can be secured on receivables without offering similar liens to the Notes, making it more difficult for the Company to raise new debt senior to the bonds.
Happy to discuss this further,
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk