Europcar : Pending new offerings on the primary market

Publication date 16/04/2018 15:36 - Writing date 16/04/2018 15:31 - - / - - - - - - - Equity data - Reco : Buy - Target : 15.00 EUR - Equity analyst: Christophe Chaput - [email protected] - +33 (0)4 72 68 27 03 - ESG analyst: Valentin Pernet - Corporate Governance: Strong opportunity (1) - / - / - - - - - Reiterating our Stable credit opinion on Europcar Credit metrics weakened last year following the Goldcar and Buchbinder deals, while remaining in line with the strategy announced by management since the IPO, a point taken into account by S&P and Moody's in their ratings. The situation should begin to improve this year in view of expected financial results and a more prudent investment strategy. - > - Support factors - - European leader in the car rental market with around 25% market share, ahead of Avis Budget (~17%) and Hertz (~15%). In 2017 the group made two major acquisitions, Goldcar and Buchbinder, helping it also gain leadership positions in the low-cost segment and market share in the vans & trucks segment. It is also pursuing a strategy of taking positions in "New Mobility" services (e.g. car-sharing, carpooling, private chauffeur services).- A business model well balanced between business and leisure customers, less exposed to airport rentals (traditionally more competitive and more cyclical).- A flexible cost structure to adapt to business cycles, through dynamic, low-risk management fleet. Europcar has shown that it can quickly rightsize its fleet to meet demand, as investment decisions are made only a few months in advance, whilst trade-in agreements with manufacturers help reduce or increase vehicle holding periods as required. Europcar also incurs precious little risk of losing value on the second-hand market, given that around 90% of vehicles are purchased under these buy-back agreements. - Points to watch - - Lukewarm 2017 results. The adjusted corporate EBITDA margin shrank by 0.9 pts in the year, dented by losses related to the development of the "new mobility"services business (-€ 13m). Excluding this business, the margin stabilised at 11.8%, whereas management initially envisaged an improvement. The main culprit was the disappointing topline in the UK (17% of 2017 sales) which was impacted by the investigation, launched early summer, into its practice of overcharging customers for repairs, but also by less buoyant trading conditions (Brexit effect). In all, Europcar estimates that the poor showing in the UK lopped 0.6-07 pts off its EBITDA margin. This was offset by intensified cost-cutting efforts in the second half, which is satisfactory. Europcar is still aiming for a corporate EBITDA margin (excluding new mobility) of above 14% by 2020 (acquisition-related synergies and cost optimisation programme, including at head office level). - Deterioration in credit metrics following the Goldcar and Buchbinder acquisitions in 2017, with a corporate leverage ratio that increased to 2.6x pro forma (vs. 0.9x at end-2016) which, adjusted for fleet-related debt, including leases, even exceeded 5.5x on our estimates. S&P and Moody's reaffirmed their B1/B+ ratings, but will monitor that the debt does not rack up. Note that Europcar is still open to acquisitions, but these are, for now, expected to be "bolt-on" transactions.