Rekeep (Manutencoop) – Santobono case and 2020 guidance
All,
Please refer to our unchanged analysis here.
The news on the Santobono legal case is better than expected. The revenues impact from a 6-months tendering ban is guided at EUR13-55m per year, over 5 years, from 2022 onwards. This would imply an EBITDA impact of EUR1.3-5.5m on a 10% margin. Management had previously guided for a EUR70m revenues/7m EBITDA impact per year. We estimate the difference is because of the ban being applied to a smaller perimeter than originally expected. The ban will cover only Rekeep Spa (facilities management). The EUR10,000 fine is not material for the group.
As discussed in our analysis, we see this impact as very manageable for the company. Facilities management is a business with a very significant variable (contract associated) costs/relatively little overhead. And in Italy (and most European contracts) the employees working on a contract are legally required to be transferred to the winner bidder in any case. Therefore, Rekeep’s approach of applying a 10% EBITDA margin on any revenue impact is justified.
Rekeep also released a EUR118-120m post-IFRS 16. EBITDA estimate for 2020. This would be equivalent to EUR110-112m on a pre-IFRS 16 basis which underlines our projections and is bang in line with our EUR111m estimates. Nevertheless, we estimate this will reassure bondholders, as it implies a 10% yoy growth in pre-IFRS 16 EBITDA for Q4 20.
The company also notes that it will continue to pursue bond buybacks “from time to time”. With the bonds already trading around the 104.5 call price, we see significant incentives for company to refinance the 9% coupon bonds before the step down of the call price to 102.25 on 15 Jun 2021.
We have a position on the Rekeep bonds for 6% of NAV. We expect today’s release to support the company’s path to an early refinancing with a lower coupon. We have entered the position in June and increased it in early November. The resilience of the business, and the key FM4 and Santobono cases, have played out a bit better than we expected.
Rekeep will hold a call today at 3 pm CET/2 pm UK time to discuss these developments. It is a positive sign that management is learning to be proactive when it comes to investor relations, which may further support a lower coupon post refinancing.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano
___________________
E: jtorii@sarria.co.uk
M: +44 794 73 56 163 (preferred)
T: +44 203 744 7055