Takko - 80 million Euros, positioning.

All,

Please find our updated analysis on Takko here.

Tracing exactly where all the money went - or suddenly came from - has complicated business. Much easier then and perhaps more to the point is the question: How much has Takko lost in the Pandemic? If we are content with the idea that discount retailers will - give or take another lockdown - return to a new normal that won’t be too far off pre-pandemic conditions, then measuring the net cash irretrievably lost during the pandemic and adding that to pre-pandemic leverage stats should get us at least somewhere.

€80m:
- Astonishingly, for a company that has had to close all its stores more than once in the last 15 months, Takko has lost no significant money at Operating Cashflow level - before net working capital changes.
- The €115m it had to borrow in that period have been used for €62m of NWC and €47m of interest payments.

- NWC: Takko already took a €12m write-off in Q4 and we think further impairment of €20m should be conservative, given that in particular much of the excess AW 20/21 inventory was never shipped to stores in the first place, which conserved its value, allowing Takko to sell it in AW 21/22 without too much discount needed.

- Interest: Paid. Won’t come back.

=> So the total amount of cash lost is €47m interest + €12m worthless inventory + €20m possibly worthless inventory = €80m.

Leverage:
- By the record-breaking 2019 EBITDA, €80m are a mere 0.5x. We prefer to be more conservative in our projections. But it is by no means an amount that Takko cannot carry. Takko was not struggling before the pandemic and it won’t be struggling as a result of carrying €4m of additional interest.

Liquidity:
- Takko now has ample liquidity and management forecast to hold on to it so as to be holding approx. €100m on BS at various balance sheet dates.
- Slide 14 of the Q3 presentation this week showed an inflow in June of €100m. There seems to be much confusion around that, but in as little as four weeks and cutting off before a quarter end the figure mostly represents plain revenue and the graph cuts off before the expenses hit. Nevertheless, average July performance is €85m, so €100m is more than in line with the +16% revenue growth since 2019 (pent-up demand) that management were citing.
- Management were implying on the call that the renegotiated supplier terms would not reverse and that it could hold on to the longer payables. We are sceptical of what we’ve heard and have modelled an outflow instead. Never mind, there is more than enough cash, even if Takko re-pay another €30m of their €40m deferred payments in Q2 and the remainder in Q4.

Positioning:
- We are taking a 5% of NAV position in Takko’s bonds at 93c/€ for a YTW of just under 10%. We are at risk of chasing the reopening trade with this position, but safe for another lockdown, Takko is well positioned to normalise.- The primary risk to the trade stems from the Delta Variant now accounting for 60% of infections in Germany. While infections are currently very low in the country, the variant is more infectious. Meanwhile the continent is lagging the US and the UK in vaccinations, so another spike cannot be ruled out and it could happen before enough people have been vaccinated, i.e. cause another lockdown in the fall. If so, we would be selling the position again as baskets are effectively exhausted. But we have no doubt that investors would see through the lockdown, given the limited damage the first two have inflicted - all things considered.

Wait - weren’t we short just recently?
- We have been short this name only recently, but trading during Q4 and Q1 was better than management had advertised. It turns out when comparing Slide 14 with the liquidity forecast published in early March (for the €54m rescue financing) that at the time of publication of that forecast the company was already €40m better off than its forecast had suggested (€50m at funding 10 days later). Also, management must have known that current trading was improving in March as some stores were reopened (seemingly not reflected in the forecast), ultimately leading to an additional €60m cash delta over the remainder of the same month. Add to those €110m another €54m of financing less a €50m shortfall in the subsequent lockdown until May and voila: The source of the additional liquidity we were all wondering about.
- So in a nutshell, management's February cash forecast had always been far too negative and was already outdated at publication in early March.

Happy to discuss,


Wolfgang

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

www.sarria.co.uk

Wolfgang FelixTAKKO