Modulaire - Peace Dividend - Model Update
All,
Please find our slightly updated model here.
The Modulaire story hasn’t changed much in the last few quarters. Revenue and cash flows are not deteriorating further, but are not yet improving. The company is a macro play on the recovery of the European construction market, which in itself is a play on peace in Ukraine and (to a lesser extent) the Middle East. On our current forecasts, we see Modulaire as having sufficient liquidity. Our model assumes that the impact of the current conflicts will lessen by H2 20260. FY results last year were in early April, whilst no date has been confirmed yet, we expect a similar date in 2026.
Investment Discussion:
We do not have a position in the SSN or the SUN yet. The SUNs are a play on peace in Ukraine and the Middle East, and will not recover much until this helps construction confidence grow. Our forecast is for utilisation rates to stabilise and improve in 2026.
- 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. A >1,000bp pick up from the SSNs to the SUNs is superficially attractive, but in the absence of a catalyst for improvement, we see little movement in the near term. We see 10 points of downside in the SUNs (to YTW of 25%) and 15 points of upside (YTW 12%). We see the upside as unlikely in the near term The SSNs at <7% are fully priced; we see 5 points of downside (YTW 8.5%).
- Whilst we have seen the press rumours of a sale of the Australian business, we cannot see this happening in the absence of a liquidity crisis at Modulaire, as Australia is seen as offering higher growth than Europe over the long-term
- With €250m of liquidity, we do not see a significant risk of distress for Modulaire, but, whilst sustainable, the capital structure is tight, particularly in light of the lack of maturities before 2028. If the European construction declines further, we will revisit our calculations.
- 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. The recent partial refinance demonstrates investors are relaxed and are looking to improvement as the cycle turns
Key Conclusions:
- As highlighted in our Trading section, weakness in the UK and French Construction is hurting performance. We do not expect significant improvement until 2026, despite the comps getting easier from Q3 2025. Our Model shows improvement in cash generation in 2027.
- 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 (€2.3bn debt and €450m 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.
- The temporary accommodation industry is localised as units are expensive to move long distances, so the industry remains fragmented. Despite the basic products and services being commoditised, 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% of revenues coming from Industries/Services and Construction, and the US business was sold for an EBITDA multiple of 8.2x in June 2024.
Recent Trading:
Q325:
- Management acknowledged that France and the UK were unlikely to see much improvement before H2 2026, but things are no longer getting worse. Q3 Revenue and EBITDA were broadly in line with our model. OCF was higher, partly due to a better WC performance than we expected. Non-cash items (we estimate at €18m also boosted OCF. Gross margins were down 230bp to 51%; some of this was down to the UK, but part of it is due to an increase in asset sales vs rentals (which attract a higher margin).
- Modulaire has instigated a cost-cutting programme without providing details on the potential savings (they will provide a detailed plan to market in Q1 26). However, we remain sceptical. Management has said that 70% of Modulaire’s €1.1bn cost structure was under review, but If cost savings were easy, they would have been made by now. After all, Modulaire has been in PE ownership since 2004 (TDR and then Brookfield). Still, by way of example, savings of 5% would equate to a near €40m boost.
- Fleet utilisation has bottomed out at 76%, and management has always maintained that >80% is the minimum they are happy with over time.
Potential sale of Australian Business:
- A number of you have enquired about the potential sale of Modulaire’s Australian business. Brookfield will be reluctant to sell the Australian business. They will only proceed if they are bearish on when the European construction sector recovers. In our model, Modulaire has sufficient liquidity to sustain it through to our expected improvement in H2 26.
Aengus
T: +44 203 744 7055