Takko - Recap Model - Positioning
All,
Please find our updated analysis here.
In light of the current state of the market, the methuselahmic sponsor of 10 supportive years, cost pressures all round, disposable income concerns, Takko are again worth sharpening our pencils for. To be sure, Takko have performed admirably throughout the pandemic, even when considering the fresh cash injection last year. But the debt pile it has been carrying so lightly in years gone by is now becoming very very heavy. We have been toying with a recap model and have extended our forecast to take more of an owners’ view of the name.
We goofed:
Disaster has struck. We had written a note on May 25th (see below) which we have apparently never sent. Following the Q4 results, we had concluded that Takko would have to restructure and therefore had decided to sell the bonds. It turns out, however, that we never actually sent out this mail. So weeks later we find ourselves still in possession of the bonds (this does not happen to real funds…). We, therefore, are selling the position now - 10 points lower. For our email back in May, please refer to the annex below.
Thoughts on Recapiltalisation:
- There is a chance that bondholders split into two groups. Those that equitise in full and those that largely roll into a new instrument. If so, the latter might be able to write off less in return for a large OID, i.e. the stub would not trade at par, but the face value may be less impaired.
- For a more basic scenario, we have set some constraints:
a) A new marketable bond would have to be rated B-. But because we don’t know what that means we have assumed less than 4x leverage and 2x FICC.
b) The RCF and LC banks would like to see the TLB disappear.
c) No fresh cash from the shareholders.
- We conclude that in order to satisfy above constraints bondholders would have to write off €100m and any future shareholder would have to bring another €100m in cash.
- We also find that the EBITDA multiple of the future debt pile is not the limiting factor, but affordability. We have concerns that at current implied market levels, Takko would be unable to afford net debt of even 3.5x EBITDA if it doesn’t include a significant sweetener or PIK.
- Because Takko have their infamous LC facility in place, however, we assume trading can remain stable throughout negotiations and a solution can be found at a time when the market is perhaps just a little bit friendlier.
Positioning:
- We are now selling our Takko bonds - late as it is. We are concerned that even as the company is to report all-time-high LTM EBITDA on the next occasion, the refinancing discussion will drive prices even lower.
- However, we are looking forward to buying back our exposure at lower levels. Even as heavy restructurings may not be the flavour of this year, the chance of owning Takko for €500m or less is ultimately not one we want to miss. So we may be a little cute here and the larger accounts will handle this differently.
- Takko is suffering from no secular decline, unlike much of the mid-market that is facing online substitution and a greater squeeze on disposable income. The business model is volatile, but unimpaired, as is the store portfolio and the re-equilibration of its gross margin is merely a question of two or maybe three years. We’ve been here before with Takko and made out like bandits. What works once works twice.
Please see the mail from May below for further thoughts.
Happy to discuss,
Wolfgang
Takko - Normalised CF - Positioning
Wolfgang Felix - May 25, 2022
All,
Please find our still unchanged analysis here.
Since the company negotiated its extension of Facility B, we had admittedly not been overly close to developments on the ground. Fortunately, however, it seems that everyone else was because for some reason the bonds practically did not move on yesterday’s report.
Performance:
- We were disappointed by the severity of the impact German Covid restrictions (2G) had on the business. Compared to similar periods last year (spring) it seems that the high street fared better relative to retail parks.
- Also by the same comparison, Douglas for instance had fared better. Note that Douglas are reporting Q2 today and we are also a little bit disappointed, if less so.
- Q2 for Takko, management signalled, would continue to carry some impact as the lifting of restrictions did not result in a wave of pent-up demand in the same way it did in previous periods.
- We now see peak LTM EBITDA next quarter at €165m before mere annualisation should take it down to €140m. The company further needs to build inventory to execute its strategy of price investment as it intends to take market share by absorbing some of the inflation. We are not sure the price elasticity will be immediate enough to pay off between now and refinancing.
Refinancing:
- The May 2023 maturity of the RCF and all other super senior facilities, including LCs requires a solution only three months after Matalan.
- Over the last decade Takko has outperformed Matalan, but it is equally leveraged through the SSNs - not counting the LC facility.
- Takko has enough cash to pay down the Facility B, leaving only a new undrawn S.S. RCF, €50m of finance leases and the LCs senior to the Bonds.
- Bonds are CCC-rated and pay 5.375% coupon. In this market certainly, that would almost have to double if refinanced like-for-like.
- Apax have been in the name for over 10 years. After several additional cash injections, we are not seeing the sponsor in a position to contribute further.
- The SSNs are the most junior instruments. In contrast to Matalan there are no 2LNs to screw, nor are there ties to the UK to give access to a scheme of arrangement.
- Takko has had to extend the Facility B to next year as it was (in a difficult market) apparently unable to negotiate a refinancing. So holding the bonds at 90 now is a bet on a significantly better market in a year’s time.
Normalised CF:
€150m Long-Term normalised EBITDA
€-25m Inflation / FX / logistics headwind and/or renewed Covid restrictions in Autumn
€-25m not so extraordinary items. Takko keep leaking cash between EBITDA and OCF.
€-25m CapEx
€ 60m FCF
-> On over 500m of CCC bonds, Takko would have to pay some €50m interest, which seems an unlikely burden for the retailer.
Positioning:
- As we are feeling the pain on other retail positions where companies are in far better positions (Douglas) and are registering the resistance to refinance a similarly placed Matalan, the CCC- Takko bonds at 90 seem to defy gravity somewhat. We will therefore unwind our 5% of NAV position in the name for the time being.
- This is a tactical manoeuvre owing to the current state of market and not a reflection of a particularly negative fundamental outlook on the company.
- We will maintain a close look on the retailer going forward and after the Q1 results in June/July (easy comp) potentially enter a short position - if available. The refinancing could then enter a period where the market may still be weak, but Q2 will be a tough comp in October when those dreaded Covid restrictions could come back (see threats from German Ministry of Health/Fear).
Happy to discuss,
Wolfgang