Paprec : Paprec: When in doubt, don’t throw the bonds out. Recycle, it’s your future!

We are initiating the coverage of Paprec with a n Overweight recommendation on the issuer. Paprec is a leading player in the waste management industry in France, enjoying leading positions in paper, cardboard and plastics recycling, as well as in construction waste recycling and the selective collection of household waste . Over the years, Paprec has grown its scale and expanded geographically through bolt-on acquisitions. However, these debt-funded acquisitions have also led to high leverage . In April 2017, the company completed the acquisition of Coved – a France-based waste management services company specializing in waste management services with a strong focus on municipalities . In 2017, Paprec reported revenue of €1.3bn (53% from waste management services and 47% from the sale of recycled materials, bought-in goods and equipment) and EBITDA of €157m. The European waste management industry has seen a trend toward increased waste recycling, over landfilling and incineration, which have been the most traditional form of waste disposal in the region. In France, the recycling of total waste grew to 22% in 2015 from 12% in 1998 owing to changes in regulatory requirements, consumer preferences shifting toward environment conservation and the taxation of other harmful waste management methods. The bonds appear fairly valued to us. Indeed, even though the company is capital intensive and is exposed to regulatory risks, we like the firm’s fundamentals and the underlying industry. We also view positively that Paprec is owned by both the Petithuguenin family and the French state investment fund BPI. Nonetheless, the current issues with the Chinese customs and the rise in energy costs (due to higher oil prices) will impact Paprec’s margin to some extent. Therefore, we expect headwinds in the short term, but we believe that the group is well positioned in the medium term to benefit from the structural shift towards recycling. Hence, we expect the leverage to stay at a high level this year but we forecast some deleveraging in the coming years. S WOT analysis Strengths Weaknesses Indexation clauses providing some gross margin protection Better risk profile with Coved Strong barriers to entry Regulatory risks Poor FCF generation due to high capex Opportunities Threats The trade war constitute s (on a short-term basis) an opportunity Growing waste market Structural shift towards recycling Delay from the Chinese customs to verify the correct adequacy between Paprec’s recovered cardboard and the 0.5% impurity rate Recommendation