High Yield : V-shape is well on track in May

Synlab published relatively good Q1 FY2020 results on Wednesday. January and February were +4.9% lfl growth yoy, but due to the start of the coronavirus outbreak in March Q1 finished down - 2.6 % organically yoy and -16.7% in March yoy . France and Italy were countries with the most lfl decline -6.3% and -11.4% respectively. In Switzerland sales declined -9.4% and would have declined -4% even without Covid-19 impact due to the loss of customer late in 2019. Overall, w e have -€14m n top - line along with -€23.7m n EBITDA decline s . The difference is primarily due to largely fixed cost structure of the sector. There was marginal FCF generation of about €7mn which could have been better if Synlab hadn’t paid 2019 €20mn interest on TLB in January this year. So far, results are better than in our stress case that was part of the new study Medical Pathology. Defensive CCC+ . Adjusted leverage spiked 0.4x to 7.4x. We have got the confirmation that the RCF extension has been sec ured and the new maturity is 2023 with no change to covenants. As a reminder the RCF has been fully withdrawn and does not have a springing covenant but a drawstop when leverage is 10.7x. The management commented on the Unsecured 2023 Notes saying that nothing will be done before July. My guess is that we can expect some action on this front as usually management says absolutely nothing (except being opportunistic) on this kind of exercises. Plus, successful refinancing of 2022 FRNs showed that the market liked the sector. In July the call price will come down to 102.063 from 104.125 in June. This is getting us closer to our bet on yield convergence between Cerba 2025 and Unilabs 2025 n otes with Synlab Unsecured 2023 notes that we talked about in our big review of the sector. The difference in Z-spread is already 20bp vs. 90bp at the beginning of the week. Some colour on trading update in April and May. The management sees volumes picking up quite well. In some countries it is back to the pre-coronavirus period or even above (no specifics on countries ). The V-shape recovery is confirmed at the moment. The PCR Covid-19 volumes are quite volatile, but on average Synlab is performing 25.000 tests a day with an average price of €75 (information from the previous call) that translates into potentially extra € 170 mn of revenue from Covid-19 per quarter . Also, 20.000 antibody blood tests performed per day, the price is in the region of €20-€40 depending on the country making additional €36mn for the top-line. Combined that adds up to about 40% of revenue per quarter exactly the loss of revenue in April yoy excluding Covid - 19 testing. However, we do not have any information on the profitability of those tests , but the Synlab has a lot of capacity to increase volumes going forward. We affirm overweight recommendation on both the sector and the Synlab Unsecured 2023 Notes. Q2 FY2020 results are on August 27 .