Emeria - Let it bloom - Positioning
All,
Please find our unchanged analysis of Emeria here.
We have been singing the song for some time, but following an initial short in the name were keen not to flip-flop from short to long in one transaction. Emeria is experiencing significant cash-outflow in H1 of any year and with the liquidity position being as it is, we were not the only ones concerned this year. However, the largest outflow should be behind us already and the company has not approached us. Moreover, Emeria have sold a subsidiary, to one of its shareholders. We are a little unsure about the perimeter of what has been sold, but it should plug the liquidity gap for now. We think the company now has enough time to bed down its acquisitions and let the business bloom for a while.
Investment Rationale:
- We are taking a 5% of NAV long position in the SUNs at 81c/€ on the view that Emeria can demonstrate this year that its extraordinary items and M&A costs will shrink with paused restructuring and integration activity.
- Supportive data from the Banque de France suggests the smaller Flow business should be turning around, albeit with a lag. Mortgage production has been growing for the last 12 months, which indicates an increase in housing transactions in France.
- Following the sale of Seiitra to Orisha, an affiliate of shareholder TA Associates, we expect Emeria to have sufficient liquidity to survive this year’s WC outflow and to have enough time to shore up its liquidity for next year and beyond.
- In the short term, the biggest risk to this investment now should be the development of working capital.
Seiitra:
- Emeria have sold a software company focussed on providing specialist IT property services and which has developed a software called Powimo, claiming over 40k customers. It is pursuing a SAAS business model, but the achieved price of €35m for a business making near €20m revenue does not reflect that kind of valuation. However, Seiitra generated negative cash flow for Emeria and so we do not expect any negative impact on financials going forward.
- Internally, Emeria have replaced Seiitra with their newer roll-out of Millenium, which remains unaffected and fully within Emeria.
- We consider therefore Seiitra expendable and very much reflective of the kind of transaction we were envisioning over the last months to shore up liquidity for the company. We think Emeria also has a few more option to procure further liquidity if required.
- The above said, Emeria probably got a bad deal for the business, given its limited options.
Working Capital:
- A small business overall within Emeria is Assurimo, an insurance business that produces large WC outflows in the beginning of the year, only to recover the premia towards the end.
- In terms of WC at Emeria therefore, this business is like the tail wagging the dog. We had contemplated Emeria selling this business or requesting permission to finance it separately. As it happens, Emeria has sold a different business.
- It is due to this business and its Q1 and Q2 outflows that H125 looks so tight on liquidity.
- During 2024, Emeria had seen again a strong outflow in H1, but the previously observed return of WC in Q3 had not occurred. Management have left us with many assurances that this would be only a matter of timing and that at the time of the Q3 call already much of that WC had been recovered. Nonetheless, guidance for Q4 suddenly suggested a €30m gap in the inflow - allegedly stemming from the newly acquired UK business. On the previous Q2 call, management had still expected all the WC to return. We like management, but from our perspective, this misjudgement by management is probably the episode weighing most on our confidence.
Funding/Liquidity Gap:
- Emeria is not a typical distressed company where there is something significantly wrong with the business. It’s a classic case of good company / bad balance sheet, brought about by somewhat overly ambitious shareholder aspirations. The situation appears fixable and should not require creditor involvement.
- Historically, Emeria has been acquisitive, rolling up a myriad of small French estate agents and making acquisitions in the UK (good), Switzerland (bad) and Germany (ugly). To do so, it has always progressively drawing its large RCF and then refinancing it with a new bond in the market.
- Emeria’s chosen speed of this roll-up would be calibrated to using all its normalised FCF for constant M&A as well as subsequent restructuring and integration costs.
- When caught in 2024 with near zero NCF and a backlog of costs still to digest, following a late halt of the M&A strategy, Emeria’s liquidity started to look tight.
- If Management can drop its integration and restructuring costs following an end to the M&A roll-up, there would be little further to go to bring Emeria to the required profitability to return to the market for further funding. In light of the company’s rapid expansion in past years we’d be surprised if there weren’t plenty of scope for some cutting too. So we consider that entirely possible and therefore likely.
Valuation:
- Emeria a Real Estate Servicing roll-up has comps (in the US, where everything trades higher) trading at 20x EBITDA. Within RE Servicing the company focuses on stock business, which is highly recurring and attractive.
- Emeria’s liquidity squeeze is almost entirely home-made, due to management taking its foot off the pedal late. The refinancing music had long stopped, Emeria were still making acquisitions.
- We therefore think that Emeria could solve their refinancing requirements in the equity market (private company held by Partners Group and TA Associates) or via asset sales. We don’t think the shareholders lose the company to creditors over the funding gap.
Balance Sheet:
- The SUNs lie like a thin layer of gunpowder on top of the Secured block of TL and SSNs, structurally subordinated and unsecured, even in another jurisdiction.
- Any scenario attempting to bail in the secured block would have to play before the background of a Sauvegarde in France, in which the shareholders look very unlikely to hold on to any future shares.
- So given the divisibility of Emeria and the overall good EV coverage, we see this as a situation that the equity can solve without involving creditors - as we have just witnessed.
Looking forward to discussing this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk