Takko - Modelled lockdowns #2, #3 and #4
All,
Please refer to our updated analysis here.
Not all retailers are created equal. Takko survived the summer, despite bonds infamously hitting the 20s in March.
As they were on their way down in the 40s, we wrote that we’d love them in the 20s, but the situation around LCs trading and the sponsor missing ultimately prevented us from entering the trade at the bottom. That’s a shame of course.
Still, retailers remain vulnerable to lock-downs #2 now, #3 and #4 in H121.
Liquidity:
Having modelled a series of further, lighter lock-downs, Takko seems to have enough liquidity to survive the pandemic - if it performs as well as id did in the first one. Note here, in particular, the WC management. We suspect that the company is now better prepared, has a higher %age of OTB and German stores are remaining open in this lock-down #2.
Little permanent impairment:
Crucially, Takko is one of the retailers whose raison d'être is not challenged by the pandemic per se. Unlike mid-market retailers, discounters like Takko have in past years not been struggling with online substitution as much, protected by comparatively high delivery costs vs average basket size. Post-pandemic basket sizes have grown and delivery is only becoming cheaper, but the relative protection is still meaningful. As a result, discounters are not seeing a decade of online migration in one year, like mid-market retailers and their post-pandemic business models should be rather less impaired.
LCs:
We don’t think it will, but if the company does run out of cash, the value will still break low in the bonds. As we have seen earlier this year, a German insolvency means the LCs will effectively jump on the balance sheet or need to be dealt with. This is no different from any retailer having to fund its WC in the face of withdrawn credit insurance and if anything is more manageable, but at the moment it matters, it drops the value of the bonds all the same. Clearly, once recapitalised, that cash can mostly be recovered through new LCs, but that will also depend on any losses the LCs might have sustained.
Sponsor:
Apax had gone MIA this summer and as a PE-owned business Takko does not qualify for government-backed loans. Given how long Apax has been sitting on the name, how much support they paid along the years and how their investment has been written down several times over, we are not relying on further support.
Timing:
It is early to commit to a position in the bonds. From what we know, the company has only some E20m in postponed payables, but some further scrutiny is warranted. From a seasonal perspective, lockdown #1 hit Takko at the worst time - its biggest-of-the-year Easter business. Takko is not so much a Christmas gift destination and so its situation in retail parks, as well as the, eased restrictions in lock-down #2 point to a lesser impact this time.
It is worth doing more work, but in the meantime do let us know if you have questions.
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003