Rekeep - Time to be boring

All,

Please find our updated model here.

We are awaiting Rekeep’s Audited Consolidated FY22 numbers, but in the meantime, we have updated our model. There is no change to the model since our February note, and we remain comfortable with our 3% long position in Rekeep’s Senior Secured bonds.

Investment Rationale:

- The bonds are up 2-4pts since we went long in February, tightening the yield to 12%. We do not anticipate any near-term event risk, and with positive momentum expected from Rekeep’s backlog coupled with the tailwind from reducing energy prices, we are expecting yields to be maintained in the 10-12% range in the coming quarters.

- As previously commented, past indiscretions have always weighed on the name, and we expect some marginal deleveraging in the coming quarters.

Areas of Concern:

- In our previous note we have highlighted the main concerns relating to Rekeep, namely fines, corporate structure and bloated Working Capital. 

- Working Capital is the main operational issue with the Company managing its liquidity via recourse and non-recourse factoring. We have included the non-recourse factoring in our leverage stats as under a stress scenario factoring availability may be withdrawn. Mitigating this is the quality of Rekeep’s customers, which are predominately quasi-government entities. 

Tax Credits:

- In Italy, a new law was introduced to compensate for the increase in energy prices concerning Q2-Q4 2022. Rekeep has received tax credits totalling €27.7m in FY22 with an expected further €10-15m in Q1 '23. Tax credits can only be used to offset payments due to social security payments (employee income and withholding taxes). 

- These tax credits have masked the slight underperformance in EBITDA progression during FY22. This is partly due to the inflationary pressure the energy prices have had on margins, coupled with lower-than-anticipated renewal rates in Q1 last year. 

The next set of numbers (Q1) is due May 18th, but given the underlying stability of the business, we would expect it to be a relative non-event. 

Happy to discuss. 

Tomás

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