HSE – Delivering a future.
All,
Please find our slightly amended analysis here.
Weak consumer confidence in Germany continues to crimp customer numbers. Operationally, HSE is performing in line with our projections, whilst new customer additions and churn were in line with our forecast. Management is happy to bide its time and hopes the future is brighter.
Investment Rationale
- We hold a long position for 2% of NAV in the FRN, we see the bonds as undervalued at 42c/€. 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 HSE 24 has no maturities until October 2026 (the SSNs). There is no cash coming in from the sponsor who was trying to exit for some years before the refinance in 2021.
- Value breaks well above the equity, so the shareholders are not going to rush this fence. They would rather hold on in the hope that the results improve far faster than expected; allowing them to try to cut a deal with Creditors.
24Q3 Results in line with our projections:
- Revenue was €144m vs. our forecast of €140m as new brands introduced in the quarter performed better than we anticipated. EBITDA was €17m vs. €16m forecast, largely driven by the higher revenue.
- Working Capital movements were as expected; so far, there is no pressure on payables, although it is unlikely HSE24 suppliers are aware of creditors appointing advisors.
- Consumer confidence remains low in Germany, and this was reflected in Jewellery (highest unit price) being down 8.6% in the first nine months of the year. Progress here will be a good indication that customers are feeling happier.
- Customer numbers (and additions) came in just beneath our estimate, but the negative trend is slowing.
- We expect HSE 24 to stabilise as a smaller business.
Management not willing to comment on creditors’ organising:
- HSE 24 has an unsustainable balance sheet, and we do not believe the company can grow into this capital structure in the next two years. However, the company generates cash, so there is no trigger to force management’s hand
- HSE 24 reiterated that it had two years to complete its refinancing. The company also talked about getting to a leverage level of under 5x. We don’t see this as feasible in a two-year time frame.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055