Maxeda - Endogenous Drivers - Positioning

All,

Please find our updated analysis of Maxeda here.

We had been lukewarm on the name and we are still not deeply in love with it. But last week’s reporting seems to have confirmed enough cost savings initiatives to make us lift our forecast to a point where we see the company with approx. 5x EBITDA leverage in early 2025, the time Maxeda want to refinance. Benelux consumer confidence is low and housing transactions are stagnating. So growth opportunities are limited and unlikely, and this trade is entirely centred on management’s ability to execute its cost measures, as well as on our estimate that Maxeda are strongly enough positioned not to have to give up all margin gains to the market. 

Investment Rationale:

- We are taking a 5% position in the SSNs, having to pay up 80.5 c/€ to get them, to realise a YTM of 17%. We had previously been ambiguous on the name due to its geographical confinement between bigger countries with bigger players and therefore an apparent lack of growth stories. The company is expensing what it earns to service its debt and defend its market share. There is little value accumulation. Thus if below-discussed expense reductions fail, there is a tangible chance of an A&E or even the break-up of the business with a partial A&E that's only marginally attractive. 

- However, management have 1.5 cost levers they are likely to pull this year: One regards €10m of savings on energy compared to 2023. The other is a cost price reduction stemming from a sourcing agreement with Leroy Merlin. Of the former, we think Maxeda can hold on to most of the savings, even if we have them come in only in H2. Of the latter, we think Maxeda have to largely pass those on to the market to defend their overall competitiveness and market share. 

- As a result of these savings, we expect leverage to drop to around 5% by the end of the year, which should improve its refinancing prospects radically. We see downside protection from the commanding position the bonds take in the legal/capital structure and from the 7.5x EV multiples generally observed in the space. If need be, shareholders could sell the business with a 1x multiple discount and still make some money back, instead of forcing creditors' hands in some hopeless process.

- Thus while the company’s top-line is largely an unleveraged bet on Benelux consumer confidence and housing transactions, the trade is predicated on endogenous drivers that seem well under control and therefore highly likely to materialise.


Purchase Price Reduction:

- All industry players have been making a constant effort to reduce purchasing costs and Maxeda are not alone in the effort. We recall the company engaging in the same kind of programs back in 2017 etc. and in a near-perfect competitive environment they just cannot yield lasting effect. Given everyone is a bit on the back foot in the sector, we assume almost all of the envisioned €16m improvement for 2024 to be handed on to the customer. 

- To achieve these savings, Maxeda have been entering into a sourcing agreement with Leroy Merlin, one of France’s largest chains. 


Energy Cost savings:

- Management expect energy costs to fall by some €10m in 2024. Having already given up the vast majority of purchase price savings to the consumer, we feel more inclined to believe that Maxeda are able to hold on to these €10m. 

- Of the two cost savings programs, this one feels the more assured.


Here to discuss with you,


Wolfgang

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