Takko - Positioning and Accounting for Discontinued Management
All,
Please refer to our updated analysis here.
The company yesterday reported “Comfortable” liquidity of E52m per the end of May - some chunky E52m more than we had anticipated. The thesis therefore that Takko are running out of cash in the short term is clearly not playing out.
Q420:
- Sales and Gross Margin (adjusted for the inventory write-down) were closely in line with our model.
- However, there was a major shift of costs out of the P&L and into the Cash Flow: Staff costs dropped by over 1/3 or E24m, E10m of which related to “Kurzarbeitgeld” - furlough grants and Takko kept its usual Other Expenses line in check, which together raised Pre IFRS16 Adjusted EBITDA by E32m vs our model. In turn, Takko simultaneously saw a mighty outflow in two CF items that do not seem related to its natural flow of business:
- Other Liabilities - primarily related to staff costs (and management bonuses) and usually flat (E16m) and
- Accounts Payable - which should have remained largely flat, given the company’s implied purchases over the period (E24m). The end result is the same cash flow.
- Management claim to have made no major lay-offs except for temp. staff and temp. staff should not account for E14m a quarter (the net figure between the E24m drop from our forecast and the E10m grant).
- So we can’t help but think that much of it is a mere set of reclassifications - i.e. some IFRS-5-like treatment for two sets of “discontinued management”.
Q1:
- The Q1 call is in a month’s time, so management limited its comment on the more interesting half of the cash flow story.
- Management did not want to detail how much payment deferrals it owed at quarter-end or at present and instead insisted that the amount be insignificant in the overall context of the business and that it was comfortable it could meet the repayment schedule over the remainder of the year.
- The main two drivers we see for the current liquidity of E52m are 1) Staff Costs and 2) deferrals:
- Staff Costs dropped significantly in Q4, E5-10m of which were owing to furlough support - presumably for 6 weeks. We are budgeting E15m of support for the more heavily impacted Q1.
- Deferrals would make up the rest and likely consist of tax and rent. We are budgeting for E30m of deferrals, a manageable sum.
Outlook:
- Takko commented that it “strengthened” its relationships with suppliers and elsewhere that it honoured its purchases to take part in the rebound. That sounds like code for high inventory and deep discounting in the next two quarters to liquidate the excess, which should drive sales, but drop margins / EBITDA for the year.
- We have brightened our outlook for sales and margins since our April model, given the faster than expected progress under Germany’s Emergency Break law, but are still struggling to model significant cash balances next winter.
- During the pandemic, the Euro dropped vs. the USD, which should ultimately hand a likely unhedged Takko a 10% margin uplift - as it did following 2018. The time this uplift translates into margin is nearing and we should see comfortable margins later in the year - possibility held back by discounted inventory liquidation, but nothing to be short the bonds into.
Positioning:
We are buying back our short position for 5% of NAV at 88c/E ahead of the Q1 reporting in a month’s time. Clearly we have handed back all of the gains and are ending up with effectively 2 points of cost of borrow and the carry. Going forward, Takko may become more interesting from the long perspective again.
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003