Cerba - comment

Q1 2024 results were saved by the vet, otherwise, it was more of the same. In a quarter (that was strong seasonably), revenues came in at €503 million which were boosted by 8% volume growth in their core French market but still below our estimate at €506 million. Management acknowledged over a call that volume is expected to slow down in the coming quarters. Revenues in the Research division were predictably weak at €55 million or 9% which is slightly above our expectation of €51 million. Management expects weakness in the division for the rest of the year. EBITDA came in better than our thoughts by €12 million at €123 million with margins at 24.4% (still below the 26.4% in Q1 2023). Operating cash flow was weak at €62 million and below our calculation of €84 million due to larger-than-expected outflows from working capital and cash taxes. M&A and capex was in-line with our expectations and the company has guided the market to no new acquisitions except for earn-outs on previous acquisitions. The high point in the quarter (which was reflected in the trading price of the bonds) was the sale of the vet business to Mars. While the company did not give an exact number, they hinted that the valuation would be above €40 million (multiple of 20x + on EBITDA of €2 million). Use of proceeds would be to retire the existing drawn balance on the RCF. Management also hinted to further non-core asset sales without giving a timetable for that process. 

While the sale of the vet business was a step in the right direction, the RCF drawings will continue to grow in Q2 due to payment of higher taxes and cash interest payments which will be offset by the sales proceeds from the vet sale. In addition, with a slowdown in growth in French lab volumes, we don’t see a material de-leveraging in Q2 2024 from the current net leverage of under 10x (on a reported EBITDA basis) or 2024 unless there is an acceleration in lab testing volumes, new contract wins in the research division and a material non-core asset sale. The company is targeting a 25% EBITDA margin level though they expect to achieve that only in 2025 which could be achievable as the company continues to optimise its cost structure. Hence we still see material execution risk and uncertainty and hence the current trading price of the bonds does not compensate investors for that uncertainty.