HSE 24 – Biding your time - Positioning
All,
Please find our new analysis here.
HSE suffers from an ageing customer base and an economy (Germany) with weak consumer confidence, but the business still generates cash, and the decline is slow (like newspaper readership). The €630m of debt is too much, and the balance sheet will need restructuring, but with enough cash on the balance sheet to meet the coupon, nothing will likely happen until October 2026 when the bonds mature. The PE owners have extracted their investment and are left with a free option. Finding a buyer will not be straightforward, but it is not impossible.
Investment Considerations:
- We are taking a long position for 2% of NAV in the FRN, we see the bonds as undervalued at 40c/€. We value the business at 57c/€ discounting for the wait of up to two years for bondholders to get their hands on the business. In the meantime the running yield of >20% is attractive.
-The upside is 17c whereas the downside is c20c. Given the cash generation and upside in customer numbers from an improvement in consumer confidence, we see the downside risk as remote.
- The capital structure is unsustainable, but the next maturities are in October 2026 (the SSNs). There is no cash coming in from the sponsor, who was trying to exit for some years before refinancing in 2021 and taking a dividend.
- Value breaks in the SSNs, so the shareholders will not rush this fence. They would rather hold on hoping that the results improve far faster than expected, allowing them to cut a deal with Creditors.
- We have been unable to access the Investor Relations website, which does not indicate a desire to cooperate with investors.
Fair value is well above the trading price, but there is no near-term catalyst:
- We see fair value today at 57c/€ vs a trading price of 40c/€. After briefly looking at the business from a sum-of-the-parts perspective, we have decided that the trajectory of both halves of the company is not dissimilar enough to warrant separate consideration.
- The catalyst for restructuring will be the maturity of the SSNs in two years. The nominal recovery would be around 64c/€ discounted back to today (at 20% per annum).
- HSE 24 has sufficient cash (on our modelling) to continue to meet coupons, so the owners have a free option for a recovery in German consumer confidence.
- The best option would be a sale to another market participant (QVC/Ali Express), but there are a limited number of potential buyers.
- Provident extracted its cash in the 2021 refinance and has since sold the majority of the equity in the fund holding HSE24 to ICG plc. There is no chance that further cash is coming in, and with the equity underwater, there is little incentive to seek a buyer.
- Recoveries in a liquidation would be minimal. The fixed assets are <€20m (TV equipment and a broadcasting licence). The customer list and the brands/social media channels would have some value but not much.
I look forward to discussing this with you all,
Aengus
T: +44 203 744 7055