Elior – Kitchen steam.
All,
Please find our updated analysis here.
Elior is relying on the banks to provide liquidity as it works to restore profitability. After a good start to the year against Omnicron-impacted comps, H2 has seen improvement taper off.
Elior's leverage covenant is 6.0x in September and 4.5x from March 2024, and our modelling shows Elior needing covenant relief through to September 2024. We also estimate Elior will need €100m in RCF drawings over that period before it returns to generating free cash. If Elior can demonstrate that margins are normalising, banks will play ball. However, in distress, an asset-light business will see value evaporate like kitchen steam.
Investment Considerations:
- We are not invested in Elior. The company has few hard assets, and in a distressed scenario, the valuation could evaporate unless handled quickly.
- On current EBITDA (to FYE Sep-23), the bonds are worth 73c/€. Elior is an asset-light business, and value will disappear quickly in a distressed scenario.
- Elior must persuade its banks that FYE24 will be operationally stronger.
Our modelling has Elior needing €100m of additional cash before it returns to generating free cash in FYE2025.
-The company will also need covenant relief in September 23 and March 24. The banks will want to play ball as Elior has 25k employees in France, but there is a lot of uncertainty.
- Elior's EBITDA recovery largely depends on its ability to negotiate price increases with its clients, given inadequate provisions for inflation pass-through in most of its contracts; this is not straightforward (particularly in the case of public sector contracts where Elior's negotiating position can be hurt by the termination costs it must pay on early exit from contracts).
- We expect the Q4 numbers to continue the weak themes from Q3, but we expect improvement in FY24. Inflationary pressure will ease, and Elior will have an easier job pushing through price rises. The level of contracts abandoned remains low (<5%), so the potential cancellation costs have been lower than we feared.
- Elior reduced its full-year guidance after the 1H results. Organic growth is slowing. Elior has to take pricing that doesn't recover all its additional costs, slowing margin recovery. We have seen improvements at Atalian, so we do not rule out a stronger-than-feared final quarter.
- The FYE23 results will be out at the end of November, and we will revisit our stance nearer to that time.
Outlook must continue improving:
- After a strong start to FYE23, Elior lost momentum in Q3. However, having seen a very strong Q2 performance from Atalian we are reluctant to rule out a similar rabbit being pulled out by Elior, when it publishes its results on 22 November.
- Elior is a bet on the company’s ability to re-negotiate contracts passing through higher costs. So far, the company is not yet seeing profitability return to much of its contract base. Our modelling is already below consensus, but we may need to chop it further for FYE24, depending on the tone and guidance at the FYE23 results.
- The unsecured part of the capital structure is nominally pari-passu, but the Term Loan and RCF mature one year earlier than the bonds. Banks could use the baskets in the SUNs to refinance the Term loan and seek any gaps in the negative pledge to gain security ahead of the bonds. Having seen what has happened in Orpea, we are aware of the potential pitfalls in documentation.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055