Orpea - Where are the beds?
All,
Please find our updated model on Orpea here.
We continue to shy away from taking a position in Orpea despite the potential upside from an agreement on debt for equity swap. Our caution is confirmed by a closer examination of the evolution of the business over the FY23-25 period as portrayed by management’s projections. We have lowered our estimates due to lower number of operable beds from future CAPEX and this lowers our overall recovery values. The reality is margins are likely to remain under pressure for a longer period of time reduces any DCF valuations.
Investment Rationale:
- Our recovery values equates to 24% which is in line with current trading levels. This is due to us expecting a larger asset write down, just over €3bn, than previous, as a result of lower future cashflows. Ultimately, the value of any business is a function of its cashflow, and with projected wage costs and other variable costs, the business is not in a position to generate sufficient cashflow to support the €4.5bn of senior debt remaining on the balance sheet.
The problem:
- Our main issue with Orpea is the level of development CAPEX (excluding maintenance and IT expenditure) over the coming years and the increase in the number of beds envisaged by the Company in the coming years. Orpea's transformation plan assumed €1.6bn of CAPEX over the FY22-FY25 period, predominately front-loaded, which only yields c.9,000 additional beds. This equates to €115k per bed.
- To calculate the return on capital on the investment, we have assumed c.€60,000 revenue per bed (currently €50,000 but the expectation is that this will rise). Staff costs are currently 60% but will marginally decrease to long-term average of 53%. However, other costs will remain at c. 22% revenue, therefore combined variable costs are 75%. Ignoring fixed costs, marginal return on new beds is 25% of revenue or €15,000 per bed. This makes the payback on new beds nearly 8 years, which appears long.
Overall Projections:
- Our initial view of Orpea’s projections was that the business plan was very pessimistic/conservative. On re-examining the projections versus our model, the main issue is number of beds in service.
- We can’t reconcile the plan’s limited increase in beds over the FY23-25 period despite the level of development Capex envisaged in the plan. We had used previously disclosed data from the Company which outlined there was c.25,000 bed under construction at the end of FY20, and we had projected these beds would be completed with the c. €1.6bn of development CAPEX planned by the Company. We have repeatedly sought answers from the Company in relation to this but have not received any clarity.
- The other main difference in our model is the impact higher wages and other costs are having on margins. We had envisaged higher occupancy rates would reduce wages, as a % of total revenue, ensuring any reduction in margins would be limited. However, the Company projects 800bps reduction in margin for FY22 and FY23 (versus FY21) and only modestly recovering to 500bps lower in FY25.
- This does not tally with the Company’s bridge from FY21 EBITDAR to FY25 which sees an uplift in performance from higher occupancy equating to c.€160m or 250bps improvement in margin. Again, the Company have not provided any clarity in relation to this.
Upcoming Liquidity:
- Per 2nd of November the Group estimates it had €831m in cash. This is pro-forma for the drawdown of Tranche B and C which had already been agreed upon but excluding €200m of Tranche A4.
- Separately, the Group estimates year-end cash to be €350m. The difference of €481m is made up of €100m debt repayment (€84m Unsecured debt at subsidiaries and €16m Secured debt at Orpea SA), with the balance c.€380m due to general cash outflow from operations and/or CAPEX.
- Starting from €350m at year-end, the business is expected to generate an additional €84m in operating cash flow, and spend €300m in Development CAPEX, €426m in Holdco debt repayment and €272m debt repayment at subsidiaries over the subsequent 9 months (until September 2023). This leads to a shortfall of €564m.
- This explains the requirement of €800m, as the business can’t run with zero cash.
- It is likely to be funded via €200m draw down of Tranche A4 plus a new €600m secured debt on assets funded in February 2023.
Next Steps:
- We remain public on all documentation and data and have not entered any data room. We understand some investors and their advisers have received some further details on projections but for clarity, we have not.
- Discussions continue between various unsecured creditor groups, the Company & Madame Bourbouloux with further meetings expected by the end of next week.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk