Matalan - Model Update and conclusions
All,
Please find our updated analysis of Matalan here.
While we are still chasing unexplained cash outflows of £30m in Q4, we are comfortable with the retailer’s overall position and the future economics we have lined up for. Quoted prices for the bonds today are net of value that has been attached to other notes, but even if we attribute some of that value to seeming from the original notes, prices are undeniably down. Nonetheless, we consider this the right entry time and are confident in the investment over the coming two years.
Positioning:
We have entered the restructuring with a 5% of NAV position (at face value) in the SSNs and have notionally participated in the new notes - somewhat relying on our knowledge of the company and the parties involved, rather than on extensive public data.
FX and Cotton:
- As usual, Matalan fluctuates with these items far more than the straight calculation of its COGS and hedging exposure attributes to them.
- Sterling is off its lows now and the company has bought vast forward USD volume. We, therefore, see the FX headwind as mostly behind Matalan, but the S/S collection could still suffer somewhat.
- In 2021 Management had provided investors with a list of measures the company was looking to implement to mitigate raw material cost inflation. We do not get the impression this ever happened. The results suggest as much too. Going forward, this should be less of a concern, but we are still expecting the S/S collection to have been bought at the wrong price (cost) point.
Q4 Cash burn:
- November end cash of £78m was already low, following a terrible quarter with a GM of less than 40%.
- From there Q4 EBITDA is projected a negative £13m (have been here before), payables are down leading to WC outflow of £19m, fees are payable of £20m and CapEx is estimated at £8m. To reconcile with the expected Feb-end cash figure of £65m, we are therefore still missing the destination of some £30m.
- We have asked management for a reconciliation. Our expectation is that Matalan have had to make some up-front payments to suppliers that are not captured in their classic WC items. Alternatively, we have seen the company make deep purchases of USD forwards, but we cannot find a big new position on the balance sheet.
We are content with our position. If you have any questions - we certainly do - please reach out to the desk.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk