Rekeep - comment

Q2 results should see the bonds trade off further, although recent comments around potential asset sales are likely to mute any price movement. Q2 was below our expectations: revenue was broadly in line, but cost pressure drove a material margin deterioration and lower EBITDA. We are unsure how management sought to explain the EBITDA erosion with the loss of a contract, when that should have shown in revenue in the first place. Meanwhile, labour costs have clearly increased, contributing an estimated €2-3m EBITDA hit, but the more significant issue appears to be higher third-party/service costs.

Without a meaningful improvement in underlying earnings, the company relied on better working-capital management - in line with previous guidance to offset cash generation. Leverage therefore remains elevated, albeit that the reduction in the FM4 fine, which we include as debt, provides some benefit. 

For bondholders, the key near-term catalyst is now asset disposals. Management says it is working with advisers on a “renewed” deleveraging plan focused on targeted disposals and a “visible and lasting reduction in leverage”. Being long these bonds, we need to see execution: with limited scope for organic deleveraging, successful asset sales are now required to support bond prices.