Clariane - Viewed as two companies - Model Update - Positioning
All,
Please find our updated analysis on Clariane here.
We maintain that the best way to analyse Clariane is to construct a theoretical PropCo and OpCo structure, which enables greater clarity regarding the risks and opportunities across the capital structure. This approach allows us to isolate the operational leverage within the structure, informing our investment decision. As a result, we are taking a position in the Hybrid bonds.
Investment Rationale:
- We are taking a 7% long position in the Green Hybrid Bonds at 102%. While we acknowledge that purchasing anything associated with the French government in the current political environment carries risk, our analysis highlights the overall value within the Clariane structure.
- There is limited potential for capital appreciation in this bond, but with a yield of 13%, investors are well compensated. Given the valuation cushion, the 13% yield is generous. We would expect the company to refinance this bond in due course.
- The downside risk centres on two areas. First, the table above assumes deleveraging of the property entities to reduce LTV to 50%. This results in increased leverage at the theoretical operating company level to 4.6x through the hybrids, which is still manageable. Debt capacity is around 100% at a 1.5x debt service cover ratio.
- There is the possibility that the bonds would be called on interest dates (June). However, this risk is minuscule, with management likely to focus on other upcoming maturities.
- The second downside risk relates to the refinancing of the upcoming convertible bonds. These are callable in September, and we expect they will be refinanced. However, the company may instead choose to accept the step-up coupon of €+9%. We view this outcome as unlikely. The convertibles themselves are also an attractive instrument, with a 9.4% yield to September 2026, but we prefer the hybrid bonds.
- The reset rate of Euribor +9% would be prohibitive for the company. Assuming further asset disposals take place, the reset rate remains expensive, and we believe the bond will be refinanced.
- We were previously cautious on Clariane, primarily due to concerns that staffing costs would take longer to decline (as a percentage of revenue), given persistently low occupancy rates and an overall shortage of qualified staff. While we are not as optimistic as the company regarding a substantial reduction in this metric, higher occupancy rates do create potential for improvement.
Two Companies:
Clariane is a combination of a property company and a nursing home operator. Although the company fully consolidates the business, we believe it is more intuitive to separate it into two distinct parts.
- We deduct rent at 6.4%, which is the current capitalisation rate for the real estate assets, from consolidated EBITDA to calculate a theoretical operating company EBITDA.
- On this basis, our discounted cash flow implies a multiple of 7.0x. Leverage at the operating company level stands at 4.1x total net debt.
- The property segment operates through various partnerships, but we are using a blended ownership figure of 60%, based on data from December 2023. We have not obtained more recent figures. The valuation of the real estate has been discounted by 20%, in line with publicly listed real estate across Europe
- Reducing the market discount to 10% brings the equity value broadly in line with the current market capitalisation.
Recent Results:
- Clariane’s H1 results were somewhat soft, but the company has reaffirmed its FY25 guidance, targeting pro forma EBITDA growth (pre-IFRS 16) of 6–9%. This outlook is supported by continued organic growth, with expectations for progressive improvement in both cash flow and leverage. The company remains committed to reducing Wholeco's financial leverage to below 5.5x by the end of FY25.
- In H1, Clariane reported 2.8% pro forma revenue growth and 4.8% organic growth. This performance was driven by increased volumes, reflecting improved occupancy rates and added capacity, along with higher pricing.
- EBITDA (pre-IFRS 16) declined by 6% on a pro forma basis, mainly due to healthcare pricing reforms in France. These reforms delayed the usual annual index-linked price increases until 1 April, significantly weakening H1 profitability. Clariane expects this headwind to ease over the second half of the year, aided by cost-saving measures.
- Looking ahead to FY26, the company has provided guidance pointing to continued revenue growth and EBITDA margin expansion. Combined with planned asset disposals, net debt is expected to fall below €3 billion, with Wholeco's financial leverage improving to below 5.0x.
- A notable detail in the H1 release relates to pricing dynamics. Higher pricing contributed €89 million to EBITDA, but this was more than offset by operating cost increases, especially from scheduled wage rises in Germany, which had a €100 million negative impact. The resulting net effect was an €11 million reduction in EBITDA. This illustrates a structural issue in the care home sector: while pricing increases are being implemented, they continue to lag behind rising cost pressures, particularly related to labour. Ongoing pricing reforms, especially in France, are expected to maintain margin pressure going forward.
Potential Issues:
- Clariane is targeting to reduce the leverage at the PropCo entities to 55% which, without asset appreciation, is a transfer of value from OpCo to PropCo. Under our scenario of reducing to 50% the LTV (assuming no capital depreciation), results in OpCo incurring an additional €185m of debt to fund the reduction in PropCo debt. This is a worst-case scenario, as in practice, the partners in the Real Estate segment would fund some of the deleveraging.
- In this scenario, the leverage at the OpCo rises to 4.6x from 4.1z through the Hybrid debt, which remains a manageable level.
- The bigger threat to trading levels in the medium term is the current uncertainty with the French government. We remain vigilant to this risk, but with Occupancy rates improving and management’s significant asset disposals in the previous couple of years, the yield compensates for the current risks.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk