Takko - So easy...
All,
Please find our unchanged analysis here.
We had been disappointed to learn that Takko’s May maturities amounted to the entire Term Facility B of €80m. As per our last emails, this was threatening to require a full refinancing this spring, given how other maturities are stacked from here. Safe for the soft market environment right now, this should not have been a problem; the company has been doing very well and in line with other apparel discounters. But it did in the end open Takko to bargaining. Takko has the liquidity to pay down the loan, but Easter is coming late this year and the WC peak would have had the company managing for cash at a time when it wants to focus on growth and profits.
Maturity Wall:
- It’s now officially in May next year. All Sr. facilities are due by May 2023 and the bonds mature only six months later.
- Because that is only 12 months away, the €80m maturity this May would have triggered a full refinancing.
- While the extension may not have been cheap, Takko’s ability to pay down the facility - if required - should have limited the damage. We also expect some of the providers of this facility to be invested in the bonds, which would have taken a nose dive in the event.
- The extension by a year does not impact the super sr. Facility B’s negotiating position or recovery.
Fundamentals:
- Takko are doing very well. The discount sector has been benefiting from the pandemic and the out-of-town segment is benefiting from relatively better footfall. Sales in the last two quarters have been exceeding 2019 levels, as has EBITDA.
- We note that Q221 EBITDA is somewhat raised due to inventory accounting and cash remains elevated by some €50m, both of which should normalise again. However until at least that EBITDA normalisation Takko has two more weak quarters to cycle through to raise its LTM performance briefly to close to and EBITDA of €200m - just in time for the next refinancing and perhaps even for the long-awaited stock market float. The trajectory should become very apparent in June when Q4 is due. Q4 should still be impacted by Germany’s Covid restrictions over winter, but it should vastly improve LTM performance regardless - never mind the WC outflow.
- Inflation is less of a matter for long-lead-time players like Takko and Matalan. Even if those companies have vastly reduced their commitments in the last decade, they still lag the mid-market, where players have to “pioneer” the pass throughs. So in the competitive context Takko merchandise should be relatively cheap as inflation rises.
- Consumer discretionary is a category we’d rather be short in the face of inflation. But we don’t see Takko as that. Clothes are basic and demand is steady. Much revenue is mere replacement and kids (over 1/4 of revenue) keep growing. Accessories, usually the most volatile segment, account for less than 10%.
Positioning:
- We remain long the bonds for 5% of NAV for what we consider a 10% yield to a March 23 refinancing at the very latest. We like these economics in an uncertain year. Duration is low and bonds are 2x covered at a conservative 7.5x multiple on a conservative €155m run-rate EBITDA. If only all investing were so easy...
- Risk comes primarily in the form of another lock-down or severe shopping restrictions in Germany and to a lesser extent in any of its other markets.
- We are not holding these bonds with a view of owning the company through a restructuring. But should another Covid-related disruption really cause difficulty with refinancing, we would a) expect to trade around some of the consequent drop in the bonds, b) expect nobody to hand us the company for an implied €850m gross and including LCs ( €550m net without LCs) and be very happy in the medium-term, if we owned the company at that price.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003