Rekeep - The Italian drivers.

All,

Please find our updated model post Q2 results here

The Q2 figures were mundane at best, and with no sign of the long-awaited asset sale, some investors have exited, causing a slight weakness in trading levels. We remain sceptical about the sale of the energy business, but despite this, we continue to see upside in Rekeep’s bonds. There are some signs of improvement in the tendering and commercial activity, and while the backlog remains below 2.0x recent contract wins and commentary from the company reflect the possibility that this may improve before the end of the year. The market acknowledges the growth in the Polish division; however, this is due to extensive CAPEX. The less exciting business, the Italian Facility Management, still generates healthy EBITDA less CAPEX margins, and will remain the driver of the business. 

Investment Rationale:

- We are maintaining our 6% long position in Rekeep's bonds, which we purchased in April at 95%. We maintain that the bonds have 3 points of upside in the short term, with fair value around 8% yield to maturity. The company reported mundane Q2 results, but we are encouraged by the uptick in commercial activity.

- The bonds are rated single B, and we foresee an upgrade in the financial year 2026 on the back of stronger free cash flow and improved contract renewal rates.

- The business has positive momentum in renewals and working capital, which should be favourable for trading levels in the coming quarters. An asset sale could provide 5 to 6 points of upside, though we remain sceptical about the execution of such a sale.

- The documentation was tightened significantly, with the new bond offering additional protections, including stricter language relating to asset sales. The business is currently exploring the sale of its energy division, 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 realised, will contribute further to deleveraging. Our model includes only a partial improvement in the Polish segment.

- Downside risk is centred on the Italian Facilities Management division, which has shown some weakness over recent quarters. Although Rekeep is now separating the Energy division (for Q1 and Q2), the company has not provided historical comparatives, making it difficult to ascertain the root cause of the revenue decline.

- Contract acquisition (described as Commercial performance by the company) underperformed in the financial year 2024 compared with financial years 2022 and 2023. This is partially explained by a new Italian law requiring additional steps for entities to issue, review and award tenders, resulting in a backlog. The company expects several large tenders to materialise in the near term, and there was a partial improvement in Q1. However, Q2 showed only a limited further improvement. If this is not sustained, the bonds may decline in price, likely to the low 90s or around a 12.5% yield. This is a downside scenario, and we expect a sustained recovery. We will exit our position if renewal rates falter.

Q2 Results:

- Rekeep’s Q2 results show stable revenue with a slight decline in EBITDA, primarily due to the domestic facility management division and ramp-up costs associated with the Polish catering plants. Leverage remains unchanged at 4.1 times despite a working capital outflow caused by the launch of the new Teckal business.

- Some investors have raised concerns about the reported decline in backlog, which is due to delays in contract confirmation. However, it is important to note that Rekeep is already operating under some of these contracts, even though they have not been officially awarded, and therefore, they are not included in the backlog figures.

Further Work:

- In our analysis, we have incorporated additional data, separating revenue, EBIT, EBITDA and capital expenditure for the different divisions of Rekeep, namely Traditional (Italian) Facility Management, International Facility Management, Laundry and Sterilisation, and for the last two quarters, Energy Management (which was previously grouped within Traditional Facility Management).

- We have further questions for management regarding this data, but our initial observations include:

a) The International Business continues to grow but delivers very limited free cash flow. Capital expenditure exceeds the EBITDA generated in this segment, with only 5 out of the last 18 quarters being positive. We had assumed capital expenditure would be high in this segment, but we underestimated the actual level. We need clarification on when this will begin to normalise.

b) Related to the above, the capital expenditure in the Traditional Facility Management division appears low. Capital expenditure as a percentage of revenue has been around 1.3% since 2021. We require further information to assess whether this is sufficient for the needs of this segment.

c) The Laundry and Sterilisation division also consumes more capital expenditure than previously modelled, running at approximately 13.5% of revenue since 2021.

- We are not changing our model at this stage, but we plan to speak with management in the coming weeks to clarify these issues.

Happy to discuss.

Tomás

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk