Atalian – suspending position on lack of near-term catalyst
All,
Please find our unchanged analysis here.
While the fundamental issues around Atalian’s business model has remained unchanged since the start of our position on 2 July 2020, we see no clear catalysts for a repricing in the next 6 months. Revenues have been weak as expected, but more than at other companies, the effect of French furlough schemes has had a disproportionately positive effect, resulting in exceptionally strong EBITDA instead.
We are therefore temporarily closing out our 4% short position in the EUR2024 bonds at 95.25(YTM 5.7%).
Rationale:
- Our thesis remains unchanged. What has changed is the continued lockdown situation in Atalian’s principal jurisdictions, which keeps postponing the publication of a post-pandemic P&L.
- Markets having been focused on short term liquidity have rewarded that. As lockdowns have continued in France and the UK during Q4, we feel that the market will again take a similar stance, also because the pandemic’s precise damage on the top-line is not yet quantifiable.
- The damage should become visible however once reported quarters reflect periods without lockdowns or milder restrictions. This will guide our timing for putting the short back on later this year.
- In the current market environment we perceive an elevated risk of taking another 5 points hit with a however ill-conceived refinancing.
Revenue:
- During the Covid pandemic, revenues were weak as expected - in line with private sector-focused peers such as ISS, and much weaker than public sector-focused players such as Rekeep. Revenues contracted -17% yoy in Q2 20 (-12.1% lfl) and -9.4% yoy in Q3 20 (-3.2% lfl). As we have previously noted, in this sector contract length does not provide meaningful protection to revenues. For overwhelming commercial reasons, the volume of revenues in each period varies directly with the volumes of services provided, as it is usually impossible for either the contractor or the client to predict service needs well in advance.
- Atalian’s client profile is also far from Covid resilient, with a 24% pre-Covid exposure to Retail and 20% to Transport, and any margins and revenue gains from exceptional contracts would be very unlikely to make up for this.
Disproportionate Furlough benefit:
- While in most service credits, this government support only partially offset a major loss of revenues, in the case of Atalian the dynamics played out very differently. Atalian has for several years suffered from the structural unprofitability of many of its contracts, caused by overbidding, the inability to competitively size and manage its resources (mainly staff) in many contracts, and the resulting overall overstaffing. The furlough schemes allowed the company to temporarily offload this permanent cost problem into the backs of the government. This led to the unusual EBITDA boost of 41% (EUR21m) of Atalian’s Q3 20 EBITDA, and EUR31m of Atalian’s 9m20 pre-IFRS 16 EBITDA of EUR140m (our estimates).
- In credits such as Algeco, Loxam, OHL and others, we see strong and effectively permanent support from government fiscal stimulus. But the stimulus currently keeping Atalian afloat is of a different nature - not about building bridges but instead about keeping staff that was unnecessary well before Covid. Governments will remain supportive effectively for many years to come, but they will not finance the salaries of unnecessary staff in private companies forever and instead are gearing up to redirect stimulus to different channels into Q3 21.
At this point, with the company more concerned about interest costs and execution than liquidity, we still see a new bond issue as unlikely, as any new deal would need to come with higher coupons than the existing ones and maturity is long enough. But in this market, some sort of transaction remains a risk.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano
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Juliano Torii
E: jtorii@sarria.co.uk
M: +44 794 73 56 163 (preferred)
T: +44 203 744 7055