Matalan - Maturities and Pivot - Model Update

All,

Please find our updated model on Matalan here.

Any name with any risk attached that is rearing its head in this market will trade down. Following their Q2 Call in October, Matalan bonds are quoted lower and for a reason: the £35m S.S. financing it will have to take on to finance its CapEx and WC plan will layer the SSNs yet again. But Progress has been good, the new CEO is a win, and UK retail is doing slightly better of late. This name will again not refinance in time for maturities, and with the new capital requirements, the transaction will likely be sooner rather than later, but we find a lot to like about the retailer.

Investment Rationale:

- We continue to hold ca. 0.5% of NAV in Matalan shares and 4% of Matalan SSNs for a running yield of ~15%. Matalan will have to address its maturities before it can hope to recover earnings to do so in the market. We think, however, that the extension will be a simple one and that it should take place next year. We take comfort in the hiring of Henrik Nordvall from H&M, that shareholders/x-holders hold no sinister agenda. 

- Beyond that, the SSNs are a bit of an equity bet, in that they are a play on revenue growth. Matalan has retained its store base together, and the online channel has seen good growth recently (most likely as discount outlet), but per-store revenue is low now, and the focus must shift from cost management and stabilisation to commercial execution and growth. That's what Nordvall has come for. 

- To drive per-store performance, however, the company needs to invest in more merchandise early in the season, which causes higher WC peak requirements, and will have to finance its ambitious refurbishment and new-store program as well as various IT projects, etc. This requires a new WC facility, which will exhaust the residual £35m S.S. basket. We think that providing this financing could go along with an extension of maturities across the capital structure before or around February.

Current Trading:

- After adjusting for the unusually strong 14th week, Q2’26 revenues declined, but EBITDA grew on strong margin discipline in a heavily promotional UK retail backdrop; freight surcharges rolled off, marketing spend was cut, stock levels are clean, and September trading remained robust. Management now appears positioned to beat FY guidance even on a week-normalised basis. 

- As store and IT investment ramps up, working-capital peaks will require using the remaining £35m of super-senior capacity through a new "short term" RCF-type facility.

Model, DCF and Recap Thoughts:

- SSNs are both cash-flow and EV-covered and should expect a straightforward A&E. Their only genuine threat comes from cross-holders with larger equity and super-senior exposure, but any coercive restructuring would be prohibitively expensive and unlikely to do more good than harm, given that Matalan could plausibly refinance in the market within two years.

- The valuation is highly sensitive to revenue growth, which the company is essentially borrowing to deliver. Store expansion plus margin normalisation could yield £15–20m EBITDA uplift by 2029, with price increases contributing disproportionately: +2% p.a. adds c.£35m EBITDA, while +3.5% (inflation-aligned) adds c.£55m.

- Management’s £150m EBITDA ambition is an extreme scenario; our base case, assuming slower store roll-out and historically anchored margins, is still sufficient to refinance the capital structure—just not by 2026, but rather by 2028. For now, the return on the bonds is a matter of running yield.

Moving Parts:

- A mere return to long-term average EBITDA margins of 8-9% would allow Matalan to refinance by 2028 - if management achieves only half its budgeted improvements (our base case). 

- The hiring of CEO Henrik Nordvall from H&M indicates there is no intention on behalf of the shareholders to push an aggressive agenda on the SSNs (where ownership doesn't fully align).

- UK retail has been picking up in calendar H225. This is visible at apparel retailers, pub groups and other consumer discretionary companies. Raising prices is the primary driver of raising EBITDA.

- The new £35m "short term" facility will layer the bonds yet again, to invest in an equity bet of growth. The timing will likely coincide with a transaction to extend maturities across the cap stack.

Here to discuss this name with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk