Loxam : Loxam is bolstering its foothold in Europe thanks to the Lavendon deal

>Publication date: 21/09/2017 17:46 - Writing Date: 21/09/2017 17:44 - - Secondary market spreads - / - Forthcoming release: - Q3 2017 results 22 November 2017 - - - - - - - - - - - - - - - - - - - Strengths / Opportunities - . Loxam is France’s leading player in equipment rental to the construction and industrial sectors (20% market share), whereas the Lavendon and Hune acquisitions in February constituted an important milestone in the take-off of a European leader, in terms of size (750 branches, € 1.3bn of sales and € 425m, i.e. around +40%), and diversification. The weight of France has been reduced from 80% to below 60% in terms of sales. In addition, as Lavendon and Hune are positioned on the specialised aerial platform segment, Loxam will increase its exposure to the activity (around 50% pro forma, vs. under 30% to date), which is traditionally less cyclical and with higher margins (+1 pt of profitability on the pro forma 2016 margin, +1.8 pts factoring in synergies). In all, as Lavendon and Hune activities are less linked to the construction and industrial sectors, exposure to the construction sector’s should also decrease (59% of pro forma sales, vs. 64% for Loxam in 2016).. Loxam has proved its ability to rapidly adjust its capex to changes in demand, enabling it to safeguard its cash flow generation. The group can also benefits from capital gains on fleet disposals which helps to limit the decline in EBITDA when business is down.. Positive outlook in the European construction sector, and especially in France. Loxam should thus benefit this year from recovery in this market. According to forecasts, the French construction market is expected to pick up by 4% this year, driven by residential construction and return to growth in public works (the “Greater Paris” project).. Management will focus for the time being on the integration of Lavendon and Hune, and is not considering a major new acquisition this year. Bolt-on acquisitions cannot be ruled out.Weaknesses / Threats - . Sharp increase in debt following the group’s acquisitions, which were entirely financed by debt. As a result, the net debt/EBITDA ratio has reached 4.5x (pro forma acquisitions on a full-year basis), i.e. up 0.8 pt vs. end-2016 (3.7x) and even up 1 pt vs. the targets initially set by management, before it announced share buybacks at end-2016 for € 100m. The deleveraging process will not be initiated from this year, given that free cash flow is set to be largely negative (investment efforts in the fleet to support growth). FCF is expected to become positive again next year and help boost the net debt/EBITDA ratio, with a view to ultimately returning to its traditional comfort zone of between 3.5x and 4.0x.. Although there is no sign of reversal at the time, trends in the European construction sector should be monitored, particularly in the UK (13% of pro forma 2016 sales. What will the effects of Brexit? given that at this stage, the market has stabilised since the referendum was announced, while it was initially expected to be on an upward trend). Loxam’s management is reassuring, explaining that the trend remained strong for the moment and that in the event of a cyclical downturn, the projects launched cannot be halted, giving the group enough time to rein its investments and safeguard its financial position.. With a 84% stake in Loxam, Gérard Déprez is the group’s key man. He manages it for over 30 years.Oddo Securities recommendation - We are maintaining a Stable Credit Opinion based on a BB- rating. Admittedly, following the acquisition of Lavendon and given the current fleet investment efforts, the group’s debt is unlikely to change significantly this year. However, the strengthening of credit metrics is likely to start next year in a bid to return, in fine, to leverage that is more in line with its historical levels of below 4.0x. Regarding earnings, the group’s performance remained satisfactory driven by momentum in the European construction sector. In view of the excellent performance of the LOXAM bonds since our latest report in April, we are lowering our Buy recommendation to Neutral on the secured 2022, 2023 and 2024 bonds and on the 4.575% 2021 and 7.0% 2022 notes which have been redeemable from July. We reiterate our Buy recommendation on the subordinated 6.00% 2025 bonds. The yield is less attractive than at the issue but is still interesting compared with most of peer bonds.