Matalan - Call Desk

All,

Please refer to our unchanged analysis here.

We’d have been comfortable in our 2LNs even with a worse result. With all the negative headlines coming from the retail sector this summer: staff shortages, supply shortages, pingdemic, weather, HORECA reopening… we had trimmed our forecast somewhat. We shouldn’t have.

Q2 Performance:

- Sales were at 2018 level, the last normal year for Matalan.

- Gross Margin was very strong at 50.5%. Old stock should be very clean and full price demand remains strong.

- EBITDA was £39m a record figure.

- WC: Inventory looks light by some £25m - either reflecting timing or delays in delivery. The company has been commenting on tight stock levels.

- WC: Receivables look £15m light too, although we struggle to explain that.

- WC: Payables look as expected, but with the light inventory could be pointing to a continued £6m supplier arrears. We had modelled a reduction to £18m and will ask the question.

- FX: The company is facing a mismatch in P&L and CF as it sold its currency hedges last year. As a result there is a £4.5m charge in the CF. Again, that was guided for and is reflected in the model.

- CapEx was a light £6m, as expected/guided.

= FCF of £56m before interest of £25m

=> Cash: £173m (incl. the 17m overdraft under the RCF)

Thoughts:

- We had been very positive on this summer for Matalan and remain so - despite stock shortages - for Q3 as well. Results achieved for this summer have beaten our recently reduced expectations by a significant margin, pointing to the strength of the discounter proposition in the post-pandemic retail environment.

- Matalan already has £56m EBITDA in the bag for this year, i.e. only £44m to go to reach a solid £100m FY22 (Feb) performance. Even if Matalan miss this mark, we are confident the company can find a refinancing - including the 2LNs.

- Q3 tends to be the strongest quarter for Matalan, with back-to-school being a significant driver. Back-to-school in 2020 almost did not happen, so we are expecting strong demand this year.

Positioning:

We recently complemented our 5% of NAV position in the SSNs with a 4% of NAV position in the 2LNs at 67. If the market is not immediately begging to refi Matalan and any help is required, please call us.

Wolfgang

E: wfelix@sarria.co.uk

T: +44 203 744 7003

www.sarria.co.uk