Modulaire - Modular Positions - Model Update - Positioning
All,
Please find our updated analysis on Modulaire here.
The ink isn’t dry on the turnaround plan management presented at year-end, and we are finding more than one negative signal to concern us. In years gone by, a bet on the sponsor providing fresh cash would have been easier to entertain, but even then we didn’t get paid for that.
Investment Considerations
We are taking a short position in the Euro '28s at 94c/€ for 2% of NAV, a short in the SUNs at 65c/€ for 2% of NAV and a long in the '31s at 81c/€ for 4% of NAV. The trade is roughly self-financing and skewed to the downside. In an A&E, we expect to lose 20c on the SUNs and 5c on the '28s, while making 5-10c on the '31s (depending on if they get involved - we think yes), limiting the risk on the combined position to 5-15c/€. In a sponsor-led restructuring plan, we are expecting to gain 60c on the SUNs, also gain 5-10c on the '28s (depending on whether they benefit from fresh Brookfield cash) and lose 5-10c on the '31s by the same logic. So we roughly see the risk/return profile by 1/6 without having to pay for it. And we see the scenarios probability-weighted 50/50.
Two negative signals are driving our decision:
1. Utilisation is still falling, despite the company rolling off its fleet at pace. In light of stable unit rental rates, that equates to demand still falling faster than the fleet can shrink.
2. The DIC division (while still being reported separately) is registering up to -15% YoY contraction. This is the leading revenue stream, and we think it foretells further pain in the leasing stream.
The freshly presented turnaround plan seems to have evaporated before it was even detailed, and management language and creditor questions have shifted towards the oncoming recapitalisation.
We see a lot of reasons for Brookfield to defend their €1.550m equity investment, but with limited downside protection from asset backing and a clear path through a UK restructuring plan, we could easily imagine recoveries in the 70s. Beforehand, we are anticipating further quarterly disappointment, as rising rates across Europe should take their toll across Modulaire's core region, and we expect to see the company having to draw its revolver in full (even though we think that should suffice to maintain liquidity).
Key Conclusions
Modulaire’s recovery continues to disappoint. A year ago we expected to be at the trough; persistent weakness in Europe, particularly the UK, now raises the question of whether we are again overestimating the pace of recovery. D&I is leading the downturn, and UK construction indicators provide little reason to discount the signal. (Current Trading, Driver, Industry)
Utilisation fell to 75% in Q2 2026 from 76% a year earlier, despite a 5% YoY fleet reduction to 235k units. This remains below management’s 80% threshold for weak trading and suggests that demand is still falling faster than Modulaire can shed units. So the trough is still ahead. The weakness in D&I is particularly concerning given its position as a leading indicator for the leasing business. (Current Trading, Driver, Industry)
The UK is at the heart of the deterioration, accounting for €15m of the €17m YTD EBITDA decline. Performance reflects a botched four-business integration, quality control failures and D&I inefficiencies, which management is still working through. (Current Trading, Company)
Liquidity should remain sufficient through the weak years, but only after Modulaire draws the remaining c.£60m RCF next year. There is little liquidity headroom beyond that, leaving no obvious buffer to support a longer-term market-based solution without a fresh cash injection. (Current Trading, Model)
We cannot flex the model enough to support a straight refinancing in 2028, or even an A&E, without assuming materially better performance. Revenue remains too low and continues to contract, leaving the company unable to cover its interest burden through 2029 in our forecast. Borrowing capacity, rather than liquidity, is therefore likely to be the central issue as the 2028 maturities approach. (Current Trading, Model, Valuation, Driver)
A sale of Australia would provide liquidity and reduce gross debt, but neither addresses the principal constraint. Australia also offers stronger structural growth than Europe, making a disposal strategically unattractive and, in our view, unlikely. (Current Trading, Industry)
Fleet management is the primary lever for liquidity: operating costs and CapEx are more closely linked to fleet size than revenue, making fleet reduction and CapEx discipline more important to cash preservation than near-term EBITDA. The European market remains structurally attractive, but the cycle is against Modulaire over the three years to maturity. (Driver, Model, Industry, Company)
Valuation already reflects a relatively low earnings base through a comparatively high implied EBITDA multiple, so we see little reason to reduce the multiple further on that basis. The key risk is the 2028 SSN wall, as the SUNs remain out of the money. (Valuation, Legal)
Current Trading:
A year ago, we expected to be witnessing the trough for Modulaire, but the weakness in Europe and in particular the UK has us wondering if we are again overestimating the recovery. Try as we might, we struggle to flex our model sufficiently to allow for a straight refinancing, or even an A&E.
The D&I division is leading the way lower, and none of what we hear from the UK construction sector is encouraging us to discount the signal.
Maturities in 2028 are approaching, and management language is beginning to accommodate investor concerns that this will not be an easy refinancing. Liquidity is looking sufficient, but with no buffer to support a longer-term market-based solution.
A much-debated sale of the Australian business would provide liquidity and gross debt reduction. But those are not the tight spots, and the Australian business provides more structural growth than Europe, so we see a sale as unlikely.
Utilisation ran at 75% in Q2 2026 (76% a year earlier), which on management's own scale (85-90% good, 80-85% standard, below 80% weak) is another very weak reading, notwithstanding fleet contraction by 5% YoY to 235k, suggesting there is further pain ahead.
The UK sits at the heart of that pain: it drove €15m of the €17m YTD EBITDA decline in 2026, reflecting a botched four-business integration, quality control failures and D&I inefficiencies that management is still working through under a new UK MD search.
Looking forward to discussing this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk