Rexel : Three bonds, three recommendations

Publication date 04/04/2018 10:26 - Writing date 04/04/2018 10:25 - Equity data - Reco: Neutral - Target: € 15 - Equity Analyst : Alfred Glaser - [email protected] - +33-1 44 51 88 93 - ESG Analyst : Valentin Pernet - Corporate governance: Strong opportunity (1) - / - / - - - - - - - - - - - - - - - - - - - - Following the full-year 2017 earnings report and given the bonds issued last year, we have updated our recommendations on the three Rexel bonds. - > - FY 2017 featured a return to growth and a reduction in leverage. - Full-year sales amounted to € 13.31bn in 2017, up 1.1% and 3.5% on a constant, same day basis and adjusted EBITA came to € 580m, up 6.1% bringing the adjusted EBITDA margin to 4.4% (+13bp).Also, in line with its strategic plan, and despite the attendant increase in the WCR and capex, Rexel saw a reduction in its leverage in 2017 to 2.8x vs. 3x at the end of 2016. For 2018, Rexel expects sales to continue growing and on a like-for-like basis is aiming for 1/ a low single digits increase in sales (at a constant number of days), 2/ a mid to high single-digit increase in adjusted EBITA; and 3/ continued improvement in the leverage ratio (net debt-to-EBITDA). - We reiterate our Positive credit opinion on Rexel - We upgraded our credit opinion on Rexel to Positive vs. Stable in March 2017. We take a positive view of the new measures announced by Rexel late 2016 which initially aim to accelerate deleveraging for two years with the leverage target capped at 2.5x from the end of 2018 onwards before providing more headroom for bolt-on acquisitions (note that there is a correlation between local market share and operating profitability). This strategy, coupled with sales growth, operating margin improvement and the outlook for 2018 led us to keep our Positive credit opinion, although we think that deleveraging will initially serve to maintain the rating rather than trigger an upgrade. - bonds, three recommendations - All three Rexel bonds offer a fairly low return relative to similar bonds in the same rating category. Still, given the probabilities of calls and market pricing, we are moving to: 1/ a Buy & Hold recommendation on the Rexel 2023 bond callable in June 2019 (YTC of 1.1%) vs. Neutral, the bond that is most likely to be redeemed next year, in our view.2/ a Reduce recommendation on the Rexel 2024 bond callable in March 2020 (YTC of 1.8% ask), a fairly expensive paper in relative terms that has priced in a probability of call in 2020 which appears uncertain to us.3/ a Neutral recommendation on the Rexel 2025 bond callable in December 2020 (YTM of 2.5%), somewhat expensive compared with peers but for which the low probability of call has been priced in by the market (pricing at maturity).