Selecta Group B.V : Flat Q1 17 discloses Lavazza provides funding for cooperation and new € 15m factoring line; we lower our recommendation to Neutral at ‘B’/Stable

Selecta’s Q1 17 results showed declining revenue on an actual basis (–0.4%), and low growth (2%) on a constant currency basis with a flat adj. pro-forma EBITDA contribution of € 26m (Q1 16: € 25.8m). Vending rent inflation and a relatively low gross margin offset higher machine productivity and SG&A reductions. However, improving cost efficiency was a key factor in our Buy rating on the instrument when we initiated in October 2016. We cannot identify any real improvement yet. Total net (8.1x) and senior net leverage (4.9x) (Oddo Adj.) remain very high. - Selecta’s cooperation with Lavazza implies the company is taking the bull by the horns to solve its leverage problem by taking its chances on ambitious revenue growth, implementing 40,000 new machines in the next four years across its public, private and office coffee service (OCS) formats. The new cooperation will not require capex as Lavazza will fund the new machines, which it then lease to Selecta (as a result Selecta’s margins might suffer). The Lavazza cooperation marks a crucial initiative and bears the potential to finally raise Selecta’s absolute EBITDA level to c.€ 115m (LTM Dec 2016: € 80.7m), the level we deem necessary to allow for some de-leveraging. But we see material execution risk and Selecta needs to show improvements soon in order to increase bond holders’ refinancing appetite. Selecta has provided no revenue or EBITDA targets, which makes it harder for us to decide if this project has real potential or is just a rabbit being pulled out of a hat. - The Q1 17 reporting revealed a new € 15m factoring agreement (€ 2.1m was utilised at end-Dec 2016) that provides short-term liquidity relief. We expect this line to be fully utilised soon, allowing Selecta to optimise its interest expenses as the inherent cost of this agreement is less than that of the RCF, according to Selecta. This allows Selecta to solve part of its tight liquidity problem for now, although at the expense of existing bond holders, as it reduces their recovery prospects slightly (Oddo recovery calculation: 64%; S&P: Lower Half 50-70%; MDY: 50%). - The sale of assets in Latvia, Lithuania and Estonia will likely be closed by end-March 2017 and could contribute a cash inflow of € 12m (our estimate), although we note that these entities, like the eastern Europe entities sold in 2016, carry above-group EBITDA margins. Selecta is not selling its crown jewels, but its liquidity measures – the Baltics assets sale, the new factoring line, and what we consider aggressive working capital management – indicate that its room to manoeuvre is decreasing. - Credit Opinion: We maintain our ‘B’/Stable credit opinion but note that S&P could downgrade the bond to ‘B–’ by mid-2017 in light of the existing negative outlook. Key to our view will be how successfully Selecta can sell the Lavazza growth story to the rating agencies. By pure mechanics, a ‘B’ rating is still justifiable. - Recommendation: We change our recommendation to Neutral from Buy because the mid bond price rose strongly from 86.2 on 31 Oct 2016 to 98.3 on 8 March 2017 – see “view and recommendation” section for more details. We note that we might recommend selling the instrument if we do not see any real operational improvements in coming quarters. - >