Emeria - Slowly - Model Update - Positioning
All,
Please find our updated analysis on Emeria here.
For fear of being early, we are not yet making this a full position, but are allowing for some room to grow into it as the restructuring unfolds and mortgage production probably dips again this year. However, we think we can about gather enough intelligence from the rumour mill to slowly start building a position that should make between 10% and 15% p.a. for several years.
Investment Rationale:
- We are dipping our toes for 2% of NAV of the 7.75% bonds on the bet that the coop has formed and a deal has been agreed. Just inside 10% running yield is not yet a screaming buy for paper that has to go through a restructuring/LME and is pushing the limits on FCCR. But the company has good recurring revenues and so the debt is value covered. We'd be seeking signed-up paper where possible to avoid a non-pro rata outcome, even as the fees would probably go to the seller. The reason we'd buy the higher coupon bond is that we think the coupon differential might survive the deal and we'd later prefer to be in the higher coupon bond.
- We are not buying the SUNs as we don't know what deal has been hatched. It appears the deal is marginal enough to require drawing the RCF, which suggests Emeria is looking for a viable Sauvegarde majority first. 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 apparently asked for a coop...
- One of the reasons we prefer the higher coupon bond is that we look at the economics from a running-yield perspective until we know the new maturity. A 10% running yield would represent 5 points of downside. From that perspective, the 3.375 has more downside if the deal is that simple and considering the low 66,2/3 majority Emeria seem to be angling for, it may have to be.
Key Conclusions:
- Emeria remains 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).
- 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. Following the Assurimo sale and subsequent RCF drawdown, liquidity should be sufficient to navigate such a process. (Current Trading; Model).
- Operationally, Q1’26 was weak in France and stable elsewhere, with Switzerland continuing to destroy value. Management expects sequential improvement through the year as seasonality and churn effects fade, implying a later recovery than we had anticipated. French RRES activity appears close to bottoming, but management already warns of further weakness in H2’26 French mortgage production (some contradiction in the guidance). Following the Assurimo disposal, the turnaround rests largely on two variables: French revenues and the persistence of transformation costs, 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 haircut - a €200m equity injection and a fixed Swiss business will lift that to 80% and considering the high share of recurring revenue, perhaps a lower FCCR is even possible (Valuation).
- The full RCF draw and creditor cooperation suggest that key stakeholders have already aligned around a solution. We think Partners Group is prioritising execution certainty and franchise preservation over extracting the last turn of deleveraging. In that framework, the senior secured layer should emerge largely unimpaired, with the SSNs reinstated at or near par and the burden of balance-sheet repair falling primarily on the SUNs, depending on how hard the sponsor wishes to engage (apparently harder than we thought - Legal).
Q126:
- Emeria is in live A&E / restructuring conversations as its shareholders, led by Partners Group, seems to be offering €200m in equity to stay in control. The company is said to have fully drawn its RCF, either to be ready to go through a sauvegarde on a 66,2/3 majority or just to have liquidity through any such period.
- The smaller units, Professional Services, Insurance Brokerage and the international markets were again on target. However, France was a disappointment. All of French B2C RRES, French B2C sales and French B2B fell well short of our expectations. French JPM is still falling, but at a lower pace, indicating that we might be reaching the bottom. Retention was up 1.5p.p. to 92.8%, but has not yet reached the target of 95%. A new dedicated commercial team has been built specifically to win mandates on existing buildings rather than relying on new construction (which is at historic lows in France). Gain of dwellings in existing buildings were up 25% year-on-year in Q1 — still early, but the first tangible commercial response to the attrition problem.
- Non-recurring items of €21m spiked again across the board, exceeding about everyone's expectations. We will have to keep an eye out for these increasingly permanent add-backs.
- The narrative was that Q2 should be sequentially better given seasonality and some fading of the churn effect; the gap to last year should narrow through the year. That is a later turnaround than we thought, and we'll have to adjust our model downwards again.
- Management disclosed €23m of restricted cash, used to guarantee business activities in France. This item will need another €6m investment, so will probably arrive at €30m.
- AI should lower costs, but not immediately. €20m net savings targeted from five initial use cases: 10% HQ headcount reduction, 10% back-office efficiency, 30% reduction in call centre live agents, and 5% sales productivity lift. One-third of savings expected by end-2027, balance by end-2028. Bruno was careful to say this is net of all implementation costs. It is a meaningful programme but does nothing for near-term leverage.
- Project Phenix almost done. €51.9m of the €60m EBITDA gain target is in the run rate. The remaining €8.1m is expected to land through 2026. This is genuinely in the numbers and largely de-risked at this stage. Still, there will always be a new project for that.
Key Value Drivers:
- The restructuring seems to be in the pipeline already, and it should keep the SSNs whole, as well as see an injection of (rumoured) €200m equity. For the SUNs, this may not be good news - the shareholders may at least try to layer them with this new cash, but we don't know that yet. The communication of the deal should drive the value off the SSNs. The debt stack is EV covered.
- We don't suppose that a €32m revenue business like Switzerland now will be producing €-13m Adj. EBITDA for a long time.
- The business has a reason to exist. A roll-up of atomised real estate managers to consolidate their back offices with superior technology makes sense to us.
- Management signals the bottom in customer churn with an improvement in retention rates in all countries (new call centres), but we've been hearing this before, and so far, we are still waiting.
Key Risks:
- The SUNs have been a bet on sponsor support going into this situation, and that support seems to be forthcoming. But negotiations look tougher than expected, and the small facility might make it tough to find sufficient support in the giant secured class that itself is divided.
- Non-pro rata recoveries are enabled. At least theoretically, there is a chance that anyone not signed up to the coop may end up with inferior economics. Particularly, smaller players should be careful.
- We have been hearing optimism on the French RRES business for over a year now. Emeria could be going sideways for longer. The French economy is not filling anyone with confidence.
- The cost savings from the Phenix and Millennium projects are being eaten up by inflation. Phenix runs out; there will be another program (AI-led) and then another.
- We can see how a bigger business with more data can do a lot with AI. But the smaller ones may be able to do relatively more. The need for consolidation may no longer be as compelling.
Looking forward to discussing this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk