Selecta - Vending a free lunch?
All,
Please find our updated analysis of Selecta here.
The vendor disappointed us with a low uplift in sales prices in Q124 of what looked like a mere 6%, down from double that in Q423 it seems (the company does not actually report these numbers). But the biggest three drivers for the refinancing next year come from elsewhere and should be sufficient to get the job done even without a further catch-up from inflation. Two of these are under management control and one seems set in stone. Looks like there is free lunch after all.
Investment Rationale:
- We are holding 2% and 4% of NAV in the 2LNs and the Prefs respectively on the thesis that the company will boom this year with Paris Olympics to come and following the end of its turnaround plan.
- On our math, the Prefs now trade at approx. 6x our 2024 EBITDA projection - if we assume KKR were ready to subordinate their piece in return for a refinancing. We think that is very reasonable.
- We have, however, been disappointed that the company has not managed to continue to raise sales prices to catch up with recent inflation and as a result have had to drop our financial forecast for Selecta. Still, we expect Selecta to refinance its SSNs and 2LNs at 5x next year with a near 1.5x FCCR if an 8% coupon is attainable. We expect KKR to equitise their Prefs in return for SSN Prefs accepting some other attractive instrument. Meanwhile, we expect the new tidied-up fleet to grow profitably - at least for a while.
- Non-payment of the Prefs does not constitute default but rather triggers an automatic conversion into equity (need 30% of SSN Prefs to request) where the KKR portion receives economic but non-voting common shares.
The three primary drivers:
1) The fruits of the roll-out of telemetry continue to show. Staff and Operating expenses remain low, both on an absolute level and relative to the machine fleet remaining.
2) One-Offs to fall drastically following the end of the turnaround plan. We are forecasting a higher one-offs expense for the year than management have been indicating, but only to be on the safe side. This should drive cash conversion of EBITDA and will be the biggest driver in demonstrating Selecta’s ability to afford its balance sheet.
3) Olympics: That Selecta are rolling out fresh food machines at the SNCF is no coincidence. 40% of the public fleet is positioned in France, predominantly at train stations and otherwise at airports. We think the Olympic Games will drive huge growth in France next year, from sales of €~20m p.a. to date. Compass sold Selecta to Allianz in 2007 only a year after the World Cup in Germany.
One or two concerns:
- One-off costs should come down as per above, but they also just have to. If they stay elevated - and there is a Dutch tax liability waiting to be paid, then the company can’t demonstrate sufficient normalised earnings power to refinance.
- In Q223, SBB renegotiated their contract and now the Swiss CEO seems to have left. We worry about negative ramifications that might come with a delay.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk