Emeria - The drift - Model update
All,
Please find our updated analysis on Emeria here.
France’s problems have been weighing on Emeria for several quarters and have gotten worse recently. Lecornu’s resignation on the morning after Macron named his (new cabinet) only reinforces our fear that the real estate servicer will struggle to grow next year. Our problem is the continued drift from one emergency to the next. Emeria began as a bet on how fast management would reduce M&A and restructuring expenditure. That bet went well. Then it was a bet on working capital. That was close. Then it was about dealing with its RCF, that too seems to be possible now. But it’s now about no growth between now and the time it must renegotiate its balance sheet. We had been meaning to buy more of what is, at its core, a solid company. But, even though this is at its core a very valuable company that could do fantastically well when the market turns, we are tiring out somewhat.
Investment Rationale:
- We may be reducing this position, but this morning we remain long the SUNs for 3% of NAV, since the market is likely difficult. The next catalysts, the sale of Assurimo and the extension of the RCF, should be positive. However, we will not be increasing our position, not in the SUNs and not in the SSNs. Time is running out to grow EBITDA sufficiently to refinance the capital structure in 2027, on 2026 numbers, as we struggle to model interest coverage above 1x by then.
- Management have all but stopped the M&A and are bringing integration and restructuring costs down late, but faster than we thought. Also, the Phenix cost saving is apparently on track, although evidently outpaced by cost inflation. Yet, cost savings are no longer the main driver of returns for the bonds. Our concern has shifted to the French economy, which is once concern too many.
- If in 2027 the shareholders don't come to the rescue, the SUNs will recover a doughnut. If they do come, the SUNs should do well. They are too small to start a cram-down process for.
- Likewise, the SSNs 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 would have to take over the business, they'd be value covered, but at least 1/4 would be equity. So in today's price of 85c/€ 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, 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.
- Application of proceeds from the sale of Assurimo to the RCF could shrink and extend it; thus, RCF maturity should not be the main issue (Recent Trading).
- Instead, the France macro backdrop 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 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).
- Management is executing well on the Phenix cost program, and one-offs are coming down late, but fast. M&A activity has been all but halted (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).
- Valuation covers debt. In a "draconian no-growth for 3.5 years" scenario with a 10% discount-rate, debt / EV approaches 100%, but we find that a harsh case to make. The reason for the high valuation remains Emeria's strong translation of EBITDA into FCF (DCF).
Next catalysts:
- Positive: The sale of Assurimo will bolster liquidity and remove the WC mountain the company would have to climb in H126.
- Positive: The company should be applying the proceeds to the RCF, which should buy it another year to 2027, when it has to renegotiate all of its debt.
- Unclear: Results should start to pick up with increased mortgage production in France. The Banque de France data continues to show a recovery, but that has yet to translate into positive LfL business for Emeria. We are concerned that France’s political woes will delay this recovery and that the market will trade the bonds more cautiously ahead of the sponsors’, however aggressive or conciliatory, opening gambit.
Here to discuss this name with you.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk