Rekeep - Steady numbers, refinancing next year.
All,
Please find our model post the release of Q3 numbers here.
Rekeep’s Q3 numbers are broadly in line with the initial focus on the partial drawing (€15m) of the RCF taking the headlines. Q3 always sees a working capital outflow, but the Company has reduced its factoring drawings, both on- and off-balance sheet by €19m in the quarter which accounts for the RCF drawings. Our focus recently is on the underperformance of the contract wins in FY24, which is impacted by change in recent legislation. Q3 was also underwhelming, but the Company stated that they expect to soon sign a large €200m+ contract imminently which will bring backlog back to FY23 levels. The tendering process is not expected to return to normal until Q1 ’25.
Investment Rationale:
- We maintain our 5% long position in Rekeep that we initially took in February 23 (@ 86%) and increased in December 23 (@ 89%). With the bonds now trading at 97% we remain confident that a refinancing will take place in FY25. The bonds yield 10% to stated maturity (Feb ’26) but we envisage a refinancing post the year-end numbers, likely in April/May. Yield to take-out in May improves yield to 13%.
- There is limited debt ahead of the bonds, and with the RCF falling due in August 2025, a full refinancing is required.
- The downside is centred on the lack of revenue growth since the last refinancing in February 2021. Any new refinancing would require c.10% coupon, versus the existing 7.25$, increasing interest costs by c. €10m. The Company has not deleveraged since the refinancing, albeit have switched some off-balance sheet factoring for on-balance sheet debt.
Working Capital:
- Due to the nature of Rekeep's clients, Rekeep has historically used factoring, both recourse and non-recourse, to finance their working capital. The Company have progressively moved this factoring to on-balance sheet debt, which increases the leverage optically. Adjusting the leverage for off-balance sheet debt, leverage has remained static over the lifetime of the bond.
- In Q3, the Company drew down on its RCF, for the first time in years. The Company justified the use due to pricing as it is cheaper than using arranged factoring facilities.
Asset Sales:
- The Company have not provided any update on potential asset sales and/or the refinancing effort, just stating that "these activities are still ongoing, and we continue to work closely with our advisors on several opportunities, including combined scenarios involving both asset disposals and refinancing of all or part of our outstanding high yield notes in the leveraged loan and high yield bond markets”.
- Press reports have circulated that Rekeep are in talks to sell their Energy business for c. €250m, but the number looks high to us.
Next Steps:
- We don’t see any reason to change our projections for the remainder of the year, with EBITDA staying in the €120-125m range. We expect a reversal in Working Capital in Q4, in line with previous years, leaving leverage at c. 4.25x for year-end (adjusted for the fine and put option).
- We await the full financials but don’t expect any major additional disclosures.
- The Company are not due to report Q4 numbers until March 2025 and we don’t expect any refinancing talks until these numbers are published. The bonds are likely to stay at c.10% yield until then.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk