All,

Please refer to our unchanged analysis here.

While the information out is scant, we find the outline of the deal very much encapsulates our expectations. The family retains control and bondholders have in effect to deeply subordinate a big chunk of their notes.

Implied valuation:

Depending on the use of proceeds from the requested ICO loan, we see the deal creating the company at approx. 5x the ever-elusive EBITDA of E100m, while the trading price of 50c/E, while the current price of 50c/E creates the the company at 4.5x through the notes, which is fair, given control, remains with the family. Those multiples are probably to expand by 1-1.5 turns after funding the CapEx backlog and further Corona-losses.

Fundamentals:

- Spanish Island tourism will not be long-term impaired and should resume fairly quickly after the pandemic. Many of the cancelled hotel bookings have not actually been repaid but rolled forward instead. As a result, there should be significant pent-up demand in this area of the economy.

- It is true that Naviera Armas have not achieved the goal of E100m in some time, although based on our work we do believe that this number remains achievable again once the pandemic is behind us. Fundamentally very little has changed at the company in 2020 and that is why there remains potential.

- We have written about the remaining synergies from the Trasmed acquisition and the roll-off of bunker hedges before. Each should lift EBITDA. On the other hand, NA have a significant backlog of CapEx - not least wrt scrubbers. The deal bestowed the company with E140m of Fresh cash, which we believe should be sufficient.

- Fred Olsen have been tearing into NA’s business over the last decade, but NA’s lower price position has proven defensible. We do not expect any change in these dynamics.

Upside / Downside:

- Downside: If vaccines fail or if an aggressive, well capitalised new entrant take a big share out of NA’s markets, then the bonds will effectively be the most junior instruments and at E360m won’t be as commanding as their near E600m weight is now. But they might still be where the value breaks. The difficulty could be asserting that position in a Spanish process when all other assets are encumbered, even in the security package likely remains unaltered in this deal.

- Aside from the pandemic, NA’s troubles endogenous. A stable ferry business with such important market shares could fetch well in excess of what is required to return par to bondholders. We are unsure about how bondholders will apply pressure to exit their remaining 50% of B-shares after having done so, but that is upside from par. Again, the family and bondholders are significantly aligned now, but control remains with the family.

5% of NAV:

- On balance we find the deal contains everything we have been looking for:

- sufficient fresh cash to address the CapEx backlog,

- Significant equity upside in a business whose industry is not long-term impaired,

- Avoidance of Spanish insolvency,

- and possibly a strengthening of bondholder position going forward (or else why bother negotiating equity if the Armas can take money out the side).

- We are therefore taking a position worth 5% of NAV in the bonds with a view to ultimately doubling that investment in the next 2-3 years.

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

www.sarria.co.uk