Emeria - The Complex Simplicity Of The Bet - Positioning - Model Update
All,
Please find our updated analysis of Emeria here.
We’ve had several good news from the company recently. The sale of Assurimo should smooth WC swings and, accretive as it was from today’s perspective, delivered significant liquidity into a renegotiation of the RCF, presumably buying everyone another year. Also, the entry of Bruno Vaquette fills us with the “hope” that he might have sought assurances from shareholders before betting his immaculate career on an 18-month turnaround. But from here, we should be down to fundamentals and a mountain to climb. Drastically simplified: On the basis of an 80% Gross Margin and 50% mortgages, would you accept 30% upside (the YTW on the SUNs) for an all-or-nothing bet on France growing by annualised 2.5% in the next 1.5 years? It’s not quite as simple as that, but all things considered, is it more complicated?
Investment Rationale:
- We are selling our position in the SUNs at 51c/€ at a loss. We've had all the good news: Assurimo is sold, the new CEO is in, and the RCF is significantly paid down. Q4 should reveal the loss of the Assurimo contribution, and organic growth has yet to take off, leading to a re-leveraging of the business over the next year. Meanwhile, even as EV covers the Sr. Sec. capital stack, we calculate a need to grow EBITDA by 50% to sustain the debt if re-priced at 7% in H227. So time is running out, albeit slowly, if we (reasonably) assume the pari passu RCF will extend. We will keep an eye on the business for a timely re-entry.
- If in 2027 the shareholders don't come to the rescue, the SUNs will recover a donut. If they do come, the SUNs should do well, as they are too small to start a cram-down process for. But if, over time, the downside of the SUNs is near zero and the upside is perhaps a little less than par, and if probabilities are roughly balanced, then a 10% running yield just doesn't quite compensate for the risk today.
- In terms of scenario tree, the SSNs look more attractive. The senior secured block would either take over the business, probably requiring some fresh cash in the process, for the looks. Or they'd receive an A&E proposal. If the SSNs were to take over the business, they'd be value covered, but at least 1/4 would be equity. So in today's price of 88c/€ we find a 5-10 cent bet on the sponsors. When we see that bet becoming cheaper, we would consider taking a position in the SSNs. Catalysts could include low growth (Q425 without Assurimo could look weak), further bad economic news out of France, or a downgrade in the bonds.
Key Insights:
- Emeria is a good business with a bad balance sheet that was not designed to hold in a higher interest environment. From an EBITDA-x perspective, It's probably the most valuable distressed company in Europe right now. The M&A roll-up was halted late and has run into a challenging economic environment in France. The sponsors would be foolish not to defend it - if they can.
- We draw some confidence from the entry of Bruno Vaquette, the new CEO. He will have sought assurances from the shareholders before betting his immaculate career. Moreover, the RCF maturity should not be the main issue following the sale of Assurimo and the subsequent pay-down to below 40% (Recent Trading).
- However, the France macro backdrop still undermines confidence in a straight refinancing of the cap stack by 2027; that the mortgage production uptick (Mortgage Production) translates into revenues in time to create the missing €120m of EBITDA by mid 2027 for a refinancing now feels more like a (reasonable) equity call than a credit case. Growth headwinds in France make a 2026 flat outcome (offsetting Assurimo disposal) plausible, leaving little runway for growth (Bruno's main aim) before March 2028 maturities (Model).
- Interest coverage on FY26 estimates unlikely to exceed 1x IAS17 EBITDA. To price €3bn SSNs + €250m SUNs at ~8%, the company would need €500m EBITDA, or 1.5x what it generates today (Model).
- M&A activity has all but halted, and management are executing well on the Phenix and Millennium cost programs. However, persistent Transformation Costs have us arrest One-Offs at -€50m p.a. (Model).
- Liquidity support from TA Associates is coming, but only in the form of acquisitions of Emeria's subsidiaries. We wonder if that means there is an outstanding conversation to be had between the shareholders. Partners Group may not be willing or able to follow its €1.8bn investment (still not written off).
- EV covers secured debt. We have raised revenue forecast and dropped margins again. Still, as the company now performs closer to model, we have moved on from our stress test valuation to a forecast based DCF on the basis of a slightly lower 9% discount rate, which we consider high for the stable operations, but adequate, considering the uncertain balance sheet situation. We therefore hold on to our 9x IAS 17 EBITDA stressed valuation, which reflects Emeria's strong translation of EBITDA into FCF (DCF).
Moving Parts in the near-term:
- Q425 EBITDA should reveal the impact of the sale of Assurimo, leaving a yet greater mountain to climb for a refinancing in 2027. Having arithmetically deleveraged following the sale, the business should re-leverage due to the now lower EBITDA.
- Extension of the RCF. The final €30m for Assurimo should have been received last month, and we don’t expect further positive cash flow beyond the now lower seasonal swings. So this should be the time when Emeria communicate the successful extension of the RCF. The RCF sits within the Sr. Sec. block and so should be interested in giving the situation time.
- Unless performance improves measurably going into 2027, the SSNs will likely receive a downgrade, if not before.
- Organic growth is Bruno’s big aim, and for a good reason. In the end, this name is all about organic growth, and that will, not entirely, but heavily depend on France overall.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk