Matalan - Discounted Discounter
All,
Please find our unchanged analysis here. An update will follow shortly.
As per this morning, there was nothing in the release that would have changed our view today - nor the way we would like to be positioned. We are not sure why the release comes so late - today being the last day and there seems to be plenty of confusion in the market as to which commitment should trade for which price. Fundamentally though, we are still talking about a company with an undiminished footprint that will have to trade through one or two seasons on unfortunate price commitment, but which should then return to claiming its usual spot in the UK - a difficult market, but at least at the discount end of it. So it will return to being a reasonably good company only with a bad balance sheet today. That’s why we like it.
Positioning:
We remain positioned with 6% of NAV in the SSNs (in nominal terms) and a notional commitment to participate pro rata in the Priority Notes. Notes are quoted around 50p/£ today, but we are not exactly clear on what the price stands for - Notes with commitment or Notes without.
As per previous mails, we would have sold our stake in the 90s, if we had felt there was enough liquidity at the time. However, we consider current indications somewhat opportunistically lowballed, implying an EV of below £240m, or below 3x next year’s EBITDA, or just 2x the EBITDA thereafter.
The Transaction:
- The auction has been “won” by the SSNs, and Matalan is receiving three new bonds, with a bid made up of £200m backstopped bonds and equitation of their existing holdings.
- The TLB will be refinanced with a Super Sr. Note paying 10% cash. A pre-committed tranche 2 of 25m remains undrawn for now.
- There will be a 2nd Lien layer ahead of the new SSNs of £75m earning S+5.5% and receiving 20% of the equity.
- SSN holders will otherwise have New 3rd Lien bonds totalling £200m (55p/£) paying 10% PIK Toggle and 52.5% of the equity. We note here that the transaction is not so highly leveraged to suggest that equity should be travelling for free here.
Projections:
- From the little that has been released, we think the projections are sensible. EBITDA is to recover to £75m in 2023 (FY24, because of Feb year-end) and to £~100m and £~113m in the years thereafter.
- At a stable 5x valuation, the equity - now under 3.25x forward leverage, should double, bringing the SSNs on their own back to par (+ interest on the £200m new bond).
- Some of the value in the current SSNs however lies in the opportunity to commit to the Priority Notes. These should be the first to be repaid over the next two years via a cash sweep and at 0.6x leverage today look adequately priced. However, these bonds also come with a further 20% of equity, which should be worth an extra £25m (33p/£) in two years.
- Clearly, chances are that once Matalan returns to health, the company will be worth more than 5x. As such the equity today might even triple over the coming two years.
Where is all the cash going:
- The notes released today have been light on execution detail as well as on balance sheet development.
- As we’ve written before, the bonds are maturing imminently, which means suppliers will want to see up-front payment. So we assume that a large share of the fresh cash required will be going to replace payables.
- The “theory” that the cash is required for working capital is supported by Matalan's cash flow budget. It foresees a cash sweep which would pay down the Priority Notes almost entirely over the coming two years. That is not a cash flow that Matalan would produce - even if all were business as usual.
- In turn, between the £91m cash balance per end of Dec. and the £93m cash post-restructuring, creditors are set to inject £75m. There is no way in which we can see this kind of money being “burnt” by operations alone.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk