Loxam : Update on the Credit profile following the bond refinancing

Published on 30 March 2017 - Written on 30 March 2017 - - - - We believe that the LOXAM bonds placed yesterday had a slightly higher premium than the ones seen in the market recently. This is due to S&P’s negative outlook and the fact that the deleveraging process will not kick off until next year, as 2017 is still a year of strong capex. For 2018, management believes that it will return to more adequate credit ratios at the end of the year (i.e. leverage of around 4x), and we believe that management’s message is underpinned by its good track record in acquisitions and the achievement of objectives it set in the past. - >Support factors - - Loxam is the French leading player in rental equipment to the construction and industrial sectors (20% market share), whereas the Lavendon and Hune acquisitions, completed in February, constitute an important milestone in the take-off of a European leader, in terms of their size (750 branches, € 1.3bn of sales and € 425m, i.e. around +40%), and diversification. As such, the weight of France will be reduced from 80% to below 60% in favour of the UK (13% pro forma, vs. 2% previously), Spain (6% vs. 2%), and it entry in Middle East (7% of pro forma sales). In addition, as Lavendon and Hune are positioned on the specialised aerial platform segment, Loxam will increase its exposure to the activity (50% pro forma, vs. under 30% to date), which is traditionally less cyclical and with higher margins (pro forma EBITDA is 1 pt higher than Loxam’s margin, or 1.8 pt including synergies). In all, as Lavendon and Hune activities are less exposed to the construction sector, the weight of construction sector’s clients should also decrease (59% of pro forma sales, vs. 64% for Loxam in 2016).- Loxam proved its ability to rapidly adjust its capex to changes in demand, enabling it to safeguard its cash flow generation. The group also benefits from reselling equipment when business is down, which helps to limit the decline in EBITDA.- 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 +3.6% this year, driven by residential construction and return to growth in public works.- Management will focus for the time being on the integration of Lavendon and Hune, and is not considering a major new acquisition this year.Points to watch - - Sharp increase in debt following the group’s acquisitions, which were entirely financed by debt. As a result, the pro forma net debt/EBITDA ratio reached a high level at 4.5x at end-2016, i.e. up +0.8 pt vs. end-2016 (3.7x) and even up 1pt vs. the targets initially set by management, before it announced share buybacks at end-2016 for € 100m.- Management undertook to return to a net debt/EBITDA ratio below 4x within two years. This is mainly driven by forecasts for earnings growth, while we expect FCF to be negative this year, given Lavendon’s acquisition and refinancing fees and capex plans (€ 400m, before reselling equipment), with most of expenditure in H1. We therefore anticipate only a slight improvement in the net debt/EBITDA ratio at end-2017. - Political uncertainties in Europe raise fears on the continuation of the construction sector’s recovery. However, Loxam’s management was reassuring, explaining that the trend remained strong for the moment and that at worst, the projects launched cannot be halted, which gives the group enough time to rein its investments in the event of a business downturn. - Gérard Déprez is Loxam’s key man, as he holds a 84% stake and has led the group for over 30 years.