Intrum - Update to our thoughts on the valuation

All,

Please find our updated model here.

Intrum’s last quarterly update was mostly incremental, but it did provide a second quarter of evidence of how the Cerberus portfolio is now contributing to the servicing business. As the company is commencing its CH11 / Swedish company reorganisation, we are relatively confident on its implementation, but - like most of the market - hesitate to apply the DoVal multiple that is underlying the plan.

Investment Rationale:

- We remain on the sidelines as we are not big fans of the equity story yet. We have seen comparable transactions suggesting management might be right to assume SEK 56bn of EV, but a detailed review of that transaction was beyond the scope of this memo. Per management's own comments, the servicing revenue was going to grow at an underlying 10% p.a. which sounds attractive, but aside from transfers from the purchasing side, we find it too early to tell.

- We also wonder if the transaction deleverages the balance sheet sufficiently, given the high coupons payable on the termed-out debt. If there has to be another restructuring in two years' time, then a 10% running yield followed by another haircut does not seem attractive to us. 

Valuation:

- As interest rates have narrowed, our valuation of the residual back-book has slightly improved. However, the back-book now only covers a mere 15% of the bonds and so the impact is not as strong as it might at first seem.

- Our valuation remains largely unchanged, as do the bond trading levels - around a SEK45bn EV, wich on our math implies our mid-case of 6x EBITDA for next year’s servicing business. The new notes should therefore start trading with a corresponding discount - around 78c/€.

Miscellaneous:

- The service business is the largest in Europe and therefore in pole position to expand in what is likely a growing field (because all collectors are now going capital-light). Time will tell if the service business can provide sufficient value to make the bonds (incl. the 10% equity participation) whole again.

- The bonds will receive a minor cash element, some 90c/€ new bonds with 2 years extension and higher coupons, and 10% of the equity. 

Here to discuss with you,

Wolfgang

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