Algeco - model update for the Q2 20 results; comments

All,

Despite Algeco’s positive growth momentum, we remain concerned about the unresolved issue of debt sustainability. Algeco’s +1.1% revenue growth before M&A, and 81% average utilization (83% at the end of Q2 20), indicate that the business held up relatively well during the coronavirus crisis. Algeco also reported organic EBITDA growth of 10%. However, we note that this momentum did not translate into improved FCF generation. The amount of “one off” cash outflows below the EBITDA line seems to have acquired a recurring nature over the past 4 quarters, depressing cash flow conversion.

We estimate Algeco’s pre interest FCF will remain insufficient to cover its interest payments this year. While the recent acquisitions should provide the company with an additional uplift in revenues and EBITDA going forward, it also comes at the cost of additional debt (and interest) at the senior secured level, notably with the recent EUR175m upsize of the EUR SSN.

In this context, we remain long the USD SSN bonds and neutral the Unsecured notes.

Please find our updated model here.

Feel free to reach out if you would like to exchange ideas on the name.

Juliano