Rekeep - Déjà Vu - Model Update

All,

Please find our updated analysis post the recent Q3 results here. 

The Q3 results announcement was overshadowed by the confirmation of the criminal investigation undertaken by the Palermo Public Prosecutor’s Office into alleged bribery and corruption. The specific contract is small in size, but the implications for Rekeep potentially could be huge. However, we acknowledge the speed at which Rekeep accepted the resignation of the President and CEO of the relevant entity and the relatively small size of the contract. We have analysed the various segments of Rekeep to estimate the potential fallout of any potential fines/restrictions imposed by the Prosecutor’s office. 

Investment Rationale:

- We are maintaining our 6% long position in Rekeep's bonds, which we bought in April at 95%. Bond prices are subject to clarity on the criminal investigation undertaken by the Palermo Public Prosecutor’s Office. Any fine would be obviously negative for the Company, more worrying would be the potential that Rekeep are banned from tendering for public sector contracts as a result of the alleged wrongdoing. 

- Although the contract under investigation represents approximately €12m of revenue, a negative outcome could be catastrophic. 

- Mitigating the potential downside is the fact that the specific contract is less than 0.5% of Rekeep’s overall backlog (and c.5% of the Servizi Ospedalieri laundering and sterilisation segment). The contract began in Q4 2024, and Rekeep has recorded approximately €1.5m of revenue to date. It is a 6.5-year contract expiring in 2031.

- Operationally, the business has positive momentum re: renewals and working capital, which will be favourable to trading levels in the coming quarters. 

- There remains the potential for an asset sale, which should see the bonds trade up to par. We have remained sceptical on the execution of the sale, but management again mentioned the possibility of a sale in order to deleverage. 

- The documentation was tightened significantly, with the new bond offering some additional protections, including tighter language re: asset sales. The business is currently examining the sale of its energy business, which would be a deleveraging event with the bonds callable at 103%. 

- The Polish business also continues to offer upside to the bonds, which, if it materialises, will deleverage further. Our model only includes a partial improvement in the Polish segment. 

Segment Analysis:

- Contained in our note is analysis which has split the business into three segments: Laundering & Sterlisation, International Facility Management, which is mainly Poland, and the balance, which is predominantly the Italian Facility Management. Since January, the Company has further split out its results for the new Energy segment. However, we only have three quarters of data, and therefore, we have not yet split out Energy from the Italian Facility Management segment. 

- Analysing the Company segments separately highlights the growth trajectory the international segment is currently showing. However, this comes at a cost of inflated CAPEX, which should return to normal levels over the coming quarters. Overall, CAPEX spend at the other segments appears sufficient, compared to the depreciation charges.

- Rekeep continue to spend significant CAPEX, ahead of its depreciation charges p.a. This has accelerated in FY24 and FY25, and is visible in the excess of CAPEX at the International segment. It is worth noting that the balancing segment, Italian Facility Management, also has an excess of CAPEX. 

- EBITDA-CAPEX margin at the International segment remains negative. This is logical as Rekeep expands its Polish operations, incurring set-up costs, some of which are capitalised.

- The Revenue growth for the Group is all from the International segment, with the other segments barely positive. 

Potential Fines/Restrictions:

- It is near impossible to estimate what the level of any sanction against Rekeep would be if they are found guilty of bribery. 

- The entity that is subject to the investigation is Servizi Ospedalieri, which operates in the Laundry and Sterlisation segment of Rekeep. It is not 100% of this entity, but Rekeep do not split it out. 

- If we exclude the overall EBITDA of this segment, c.€30m on a LTM basis, leverage would increase from 4.9x currently to 6.5x. Our 4.9x leverage includes recourse factoring, the FM4 fine and the put option related to the 20% of the Polish entity, which Rekeep does not own. 

- This is an extreme case, and given the critical importance of Servizi Ospedalieri’s work within a hospital, it is highly unlikely. However, Rekeep may be prevented from tendering for new contracts in this business segment, reducing future profitability. 

- Some investors are pointing to the FM4 fine, which totalled €91.6m. This was awarded against Rekeep because the Company colluded in tendering for national contracts for Facility Management. The overall investigation concerned €2.7bn of total value contract, with the courts handing down sanctions totalling €235m or c.10% of the contract value. The specific contract under investigation is for €12m of revenue, which would imply a €1m fine. It must be acknowledged that this is only conjecture at this stage. 

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk