Emeria - Sitting Tight - Model Update
All,
Please find our updated analysis on Emeria here.
And the wind is blowing... We bought our little toehold in the SSNs in summer, but since then the fundamentals have only deteriorated a little further, and we thought we'd have heard of more progress by now. As the case may be, the company remains fundamentally valuable, save for the churn that has by now shaved 10% off dwellings and, for as long as it continues, even more off EV. Also, the sponsor is not filling us with confidence. Yes, that seems to be a complicated shareholder structure, but we'd have expected some more decisive support.
Investment Rationale
We maintain our 2% of NAV of the 7.75% bonds on the bet that the coop has formed and a deal has been agreed. A price well above debt carrying capacity has the thesis resting heavily on shareholder contribution and holding a sellable structure on the other side, and clearly this negotiation has been ongoing for some time already, so it isn't easy apparently.
But it's a company we wouldn't mind owning at this price. Good business strategy, tech leader, attractive long-term relationships, strong cash conversion (if the M&A integration is executed well. We'd be seeking signed-up paper where possible to avoid a non-pro rata outcome. The reason we bought the higher coupon bond is that we thought the coupon differential might survive the deal, and we'd later prefer to be in the higher coupon bond. Given the ongoing churn in France, we are no longer as sure the Sr. Sec. structure gets away with just an amend and extend.
We have not bought the SUNs. The deal is clearly marginal enough to require drawing the RCF, which suggests Emeria is looking for a viable Sauvegarde route. Unless dissenters require them, we don't see the sponsors voluntarily walk through that fire for the sake of €250m - but they did draw the RCF, and they did ask for the coop...
We are holding off on building out our position until the outlines of the deal become clearer. Considering how protracted the negotiation already is, chances of a strong outcome that lets the SSNs immediately trade up are fading.
Key Conclusions
Emeria is a good business with a balance sheet that was never designed for a higher-rate environment. With c.75% of revenues derived from recurring stock business, EBITDA-to-cash conversion remains unusually strong (c.⅔ even after assuming €50m of recurring “one-offs”), supporting a valuation around 10x EBITDA and leaving the senior secured layer EV-covered. Economies of scale and data advantages continue to underpin the roll-up model, although execution outside France has been mixed, particularly in Germany and Switzerland. The UK continues strong. (Company; Industry; Valuation).
While Emeria is a good business model, some of the execution in recent years has been poor. The French JPM and LM business is suffering from high churn of dwellings under management, for which the company blames acquisition vintages of 2022 and 2023 that were apparently poorly integrated. That this should tail off is not just a matter of math (management speak), but also imagination required from bondholders at a time when they have to hammer out a restructuring plan with the shareholders.
The full drawing of the RCF and the coordinated organisation of creditors suggest that a deal has already been reached and that a consensual process may require a credible sauvegarde alternative (we may be in Conciliation). Following the Assurimo sale and subsequent RCF drawdown, liquidity should be sufficient to navigate such a process, but needs a top-up by Christmas. (Current Trading; Model).
Operationally, Q2’26 was again weak in France and stable elsewhere. Switzerland continues to destroy value, but has been classified as held for sale. Management expects sequential improvement through the year as seasonality and churn effects fade, implying the trough could now be in 2027 (was supposed to be 2025 already). Management already warns of further weakness in H2’26 French mortgage production and the rate environment is not helping. Following the Assurimo disposal, the turnaround rests largely on two variables: French churn and the persistence of transformation costs and M&A earn-outs, which remain stubbornly elevated despite periodic improvements (Current Trading; Model).
Debt carrying capacity is not convincing. We agree that this business can carry a high amount of debt vs. equity, but in the end, an FCCR of 1.4x limits how much we would put on it. For the debt negotiations currently underway, we don't think that needs to result in a Sr. Sec. haircut - a €200m equity injection will not improve trading in the SSNs, but allow for extension of maturities (Valuation).
The full RCF draw and creditor cooperation suggest that key stakeholders have already aligned around a solution. We think the Senior Secured block has strong cards but that the SUNs can only be saved by X-holdings in the Sr. Sec. block. (Legal).
Q226
Management did not comment on the ongoing restructuring negotiations.
Churn was again the theme of the quarter. JPM dwellings fell 7.2% year-on-year to 1.59m, yet LTM retention rose 1.7pp to 92.6%. Co-owners' AGMs have dropped, as overdue general assemblies, which carry a high contract-loss risk, were cut from 4% of the portfolio in July 2025 to below 1%, and big-contract retention moved from 92% to 94%.
So under the bonnet, the France development reads arguably more positively than the headline decline, as management put roughly half of JPM contract losses down to the 2021-23 M&A vintage that was "never properly integrated", allegedly a cohort that runs off over time, while legacy mandates held five years or more retain at 96-97%. This is the first we've heard of it, and we don't yet understand why these weren't "properly integrated". A new commercial team lifted gains on existing buildings 40% year-on-year. If we can believe that, we will see the JPM base stabilising into 2027 rather than a structural bleed. But management has a habit of overpromising and obfuscating, so we have modelled a slower improvement.
In total, revenue of €362m landed close to the flat trajectory we carry, with composition the story. Foncia lifted to €198m from €174m in Q1 on the seasonal AGM billing and pricing, exactly the sequential recovery guided at Q1. JPM transfer fees fell 10.7%, the direct knock-on of the dwelling churn into the flow line. LM dwellings fell 5.1% to 362k as private landlords exit an untaxed-incentive market, an external drag we read as macro-driven, not a service failure.
Pre-IFRS-16 EBITDA for Q2 was €88.0m - slightly below target and still down some 5% YoY. French volume, driven by persistently high churn and the absence of Assurimo made the difference. Non-recurring cash costs stayed stubbornly high at €41.1m for H1, up €3.4m, on German litigation cash-out and a UK site closure. We have become more cautious in assuming these can be brought down like management advertised in 2024/25.
Switzerland is now classified as held-for-sale and reported as discontinued operations, producing a €23.3m cash outflow in H1. Most expenses should have been paid for in the assets/liabilities held for sale, which included a sizeable cash balance.
Working capital turned to a H1 outflow of €30m, roughly half of last year's €59.3m due to the sale of Assurimo.
During the quarter, creditors organised under a cooperation agreement that had been requested by the company, with a due date. We therefore expect the deal is largely in execution, even though there should be tensions between Sr. Sec. holders and X-Holders.
Liquidity stands at €80.5m with the RCF now fully drawn.
Here to discuss this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk