Matalan - Modelling Covid-19 and thoughts on financing

All,

Please find our updated analysis and model here.

Having modelled the quarterly cashflows of Matalan through the next two years, we have been asking three simple questions:

1) Are £60m enough to continue operations through 2021/22?

2) What debt can the company carry in a "new normal”?

3) What would be the recovery from a liquidation?

Answers:

1) Yes, in management’s worst case scenario there would be enough cash to fund operations for long enough to right size the company to whatever the "new normal" requires.

2) That will depend on the “new normal”. We have assumed a FY 2023 recovery to 90% of a 52 week normalised version of 2019. On that basis EBITDA would reach E90m. One year earlier, in FY22, EBITDA would reach a normalised £78m. On that basis the company would just cover its interest bill, but in a real-world setup it would simply be over levered at the first hurdle it faces. FCF of 45m would cover interest through the SSNs at 1.3x well enough however.

3) Even a 1.5 lien £60m facility would be only just about covered in our liquidation scenario. This depends on a few high-level assumptions, but because this recovery is so low and the chances of positive FCF in the future so high, we don’t believe a liquidation is worth contemplating.

We remain long the legacy position in the SSNs. The present financing round has all the reasons to be successful and if so, this should be the worst time to sell. Matalan has always exhibited slight anti-cyclical behaviour and its demographic is relatively stable. Of the apparel retailers it is in one of the best positions and when consumer confidence and disposable income are restored (will take some time) the nation will buy clothes again. 

Wolfgang