Emeria - How close can you shave?

All,

Please find our updated analysis of Emeria here. 

On Emeria's website, Philippe (CEO) and Antoine (CFO) do not look particularly closely shaven. All the more ambitious then seems their pledge to keep Emeria out of trouble this H1. Emeria’s problems are mostly homemade - and can be fixed internally. It’s just that the sponsor and management seem to have been too aggressive and too slow to halt their rampant roll-out to comfortably live within their means while the pro-forma need to be realised. Still, should liquidity really become too tight, we could imagine some structural solutions around Assurimo and potentially even an equity transaction to keep creditors at bay.

Investment Considerations:

- We are currently on the sidelines at Emeria, having been short the SSNs into the Q224 reporting, only to have to buy them back higher. We see the company scraping through the first half of 2025 on minimum liquidity, but also think there are structural solutions to be found that shield the company and investors from the worst WC seasonality at Assurimo. A liquidity event now would be particularly damaging, since Emeria has not yet realised its full earnings potential after its acquisition spree, which limits its debt-carrying capacity at the moment. 

- While we do not believe Emeria deserves a 20x EBITDA multiple like the one its US counterpart FirstService is trading at, we think there is at least a little merit in the roll-up strategy and that the sponsors should feel very good reason to hold on to the business. It looks very unlikely they would lose it over this expansionary drive and would expect an equity solution if need be. 

How close is too close:

- On largely undiminished WC swings, we have liquidity as low as €70m in Q225, which must feel extremely tight for a business like this, even if that should be near the WC low point. 

- Safe for the precise timing of a few non-recurring items and the aggressive reduction of CapEx and M&A, we do not see many operational leavers to improve cash materially until then.

Equity Value:

- We struggle to see Partners Group lose this company over a too-aggressive roll-up. The medium-term value and earnings capacity are too apparent. If fresh cash is required, we expect it to come in an equity deal - if not from Partners Group and TA Associates, then from another player. FirstService In the US is trading far too well for Emeria not to find a willing investor.

- The company is good, the management is good, and the strategy is good. France is not good, but even so, the Banque de France is tracking a tacit re-birth of the mortgage market. So there is plenty of upside to capture.

Structural Solution:

- Emeria would not require as much cash if it didn’t suffer from such seasonal working capital. Chief culprit here is Assurimo, an insurance business providing guarantees to B2B customers. These are typically collected in Q4 and then paid out in Q1, introducing a €60m swing that Emeria could do without right now. 

- Assurimo generates €35m in revenues. So it’s a significant business for Emeria, but perhaps not indispensable. We think it could either be sold or financed separately. 

This is the classic case of a good company with a bad balance sheet. It shouldn’t even stay so bad for long. There is time under the documentation and with only a little growth the company is back in the market for more debt.

I look forward to discussing this name with you.

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk