Modulaire Group – Some time yet
All,
Please find our updated analysis here.
Operational performance at Modulaire has been poor since Q3 2024, and although the comparisons will be easier in H2 2025, we do not expect any improvement until the back end of 2026. France and the UK will take time to improve. The balance sheet is over-levered, but there are only limited maturities until Q4 28, so Modulaire has 6 quarters before it will need to approach the market.
Investment Discussion:
- We do not have a position in the SSN or the SUN, but we expect the debt stack to widen a little more over the next quarter, which will reflect weakness in Modulaire’s markets in Q3. Our forecast is for utilisation rates to stabilise and improve in 2026. We had been considering a long position, but our expectation of an improvement in H2 25 was overoptimistic.
- Revenue from unit sales has not recovered as we had hoped. The €114m in Q424 proved a one-off. We expect this source of revenue to improve as the construction market recovers and large projects begin to be approved by developers. We should have shorted the SUNs when we saw the continued low Unit Sales; we missed that opportunity.
- The 450bp pick up in spread from the €SSN to the €SUN is attractive and we would expect that to reduce, but not yet. There are around 3 points of downside and 2 of upside in the SSNs going into the Q3 results. The SUNs will be more volatile with 5 points of downside and 5 of upside in the same period.
- With €270m of liquidity, we do not see a significant risk of distress for Modulaire and expect tightening in H2 2026. Also, the capital structure is sustainable but tight, and there are no significant maturities before November 2028.
- There is around 1x of value under the SSN (c1x SUN + c0x equity). The SUNs are only 1x of EBITDA, so if Modulaire were to need to restructure, any New Money would have to come from the SSNs, as the SUNs would be extinguished.
- We expect Modulaire to cover interest from Free Cash Flow by 2027, but it is a long way from 2.0x, and further improvement is needed.
Key Conclusions
- As highlighted in our Trading section, weakness in the UK and French Construction is hurting performance. We do not expect any improvement until 2026, but the comps will get easier from Q3 2025.
- In our Company section, Modulaire sees 85-90% utilisation as a good performance, 80-85% as standard, and below 80% as weak. The current level of 76% needs to improve.
- Our DCF model currently indicates that there is no equity cushion under the bonds. However, our model does not anticipate this will be needed in the medium term.
- Debt of €3.8bn vs Borrowing capacity of €2.3bn shows an overleveraged balance sheet (€2.5bn debt and €500m EBITDA => 5x leverage, with 3x equity coverage)
- As noted in both our Risks and Value Drivers and our Model section, Modulaire has €270m of cash and RCF availability, which will cover the cash outflows we forecast. We expect an additional €100m of RCF drawings to be required by FYE26 €303m of the €350m RCF has been extended to 2031, and the company is seeking to extend the remaining €50m.
- The next large maturity is c€1bn of SSNs due in Q4 28. We expect Modulaire's results to improve through 2027, and an Amend and Extend rather than a par refi may be needed, given leverage levels.
- Modulaire recently completed the refinance of its TL B (and its reduction via a new SSN), as discussed in our Trading and DCF sections. The refinance has removed most maturities out to Q4 2028.
- Our Model shows improvement in performance in 2027.
- The Industry is localised as units are expensive to move long distances, so the industry remains fragmented. The products and services are commoditised, but there is potential for additional rents from other services (e.g., power, climate control, WIFI)
- The Company has diversified away from the energy sector with c60% Industries/Services and Construction, and the US business was sold for an EBITDA multiple of 8.2x in June 24.
Q225 was weak, and little improvement is expected in H2:
- Results in H1 25 have been well beneath our forecast as weakness in UK and French construction has hurt utilisation rates. Pavan Pattada’s decision to leave his position as CEO is another annoyance. The completion of a refinance in July 2025 has bought Modulaire time, as there are no substantial maturities before 2028. We do not expect the UK and France to improve over the rest of 2025, and we expect a cut in capex and opex in H2 to be more likely than the infill acquisitions that management has mentioned.
- Q2 new unit sales were +3% vs Q2 24, with overall revenue down 7%. Competition forced discounts on delivery and installation, which fell by 11%. Given the competition in the UK and France, we do not expect this to improve much in H2. We had forecast that Utilisation rates would be rising back towards 80%, but they were only 76% in Q2. We do not anticipate that the utilisation rate will reach 80% before 2026. Revenue has been negatively impacted by the fall in utilisation and rental rates.
- On a positive note, UK construction is expected to see growth of 3.5% in 2026, but we remain concerned that France will remain weak through 2026.
- Our updated forecasts do not indicate any additional cash is required through 2028, but this will require the RCF to be substantially drawn unless the markets improve faster than our expectations, or Modulaire can reduce Capex and OpEx. Management has been able to sweat their assets in past downturns, so we would expect them to do the same this time.
I look forward to speaking with you all on this.
Aengus
T: +44 203 744 7055