Modulaire (Algeco) – Q3 20 results – leaving covid behind
All,
Please refer to our unchanged analysis here.
Modulaire’s results were significantly better than our projections. Q3 20 revenues came at EUR335m (+6.5% yoy before M&A impact), above our EUR287m estimate. The outperformance is both volume and price-driven, while we expected a decline in prices would be required to support utilization. Q3 20 EBITDA came at EUR91m (pre-IFRS 16 basis), significantly better than our EUR49m estimate. Volumes was the main driver of EBITDA improvement, with some additional margin impact.
The cash balance, however, came at EUR259m, EUR55m lower than our forecast. This was driven by an outflow from working capital variations, higher capex, and a partial repayment of the RCF and of subsidiary debt.
Utilization has increased to 85%, reflecting the strong recovery in demand in the key construction and industrial sectors. The sector’s decision to stop capacity expansion in Q2 20 also boosted utilization. Revenue per unit continues to rise – the pre-covid price momentum was further supported by higher utilization. This in turn boosted gross margins. A combination of covid-motivated structural cost-cutting and the operating leverage impact reduced fixed cost absorption.
The impact on the business from a second lockdown is expected to be much smaller than the first one. All branches remain open during this second lockdown, unlike the first lockdown. The second lockdown has hit retail and personal services but spared sectors important to the company, such as education, construction and industrials.
We currently have a long position in the Algeco USD 8% 2023 bonds. The overall sector has been recovering and the company has successfully turned around its pre-covid record of declining utilization while maintaining its ability to continue to raise prices and push VAPS (value-added products and services) to clients, which explains much of the margin boost. Revenues were even stronger than we expected, which confirm that construction and industrial-dependent sectors are well on their way to recoup all of their covid-related weakness.
As we have previously noted, the manufacturing sector in Europe is mostly already back to yoy growth, and the second lockdowns are unlikely to meaningfully affect this dynamic. Recent results from key sectors such as building materials and autos have also confirmed this trend.
In this context, we will evaluate our view on the sustainability of the capital structure going forward. Our concern on the subordinated bonds remain Modulaire’s current strategic orientation towards M&A, which will continue to increased debt at the senior secured and super senior/asset-backed level.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano
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