Synlab : An attractive story, but potential now limited

>Strengths / Opportunities - - A leading position in a fragmented market with moderate growth prospects, driven by demographic trends in Europe.- Potential to enhance profitability by optimizing the cost structure and improving the analyses mix.- Solid track record in terms of integration of acquisitions and restructuring. - Comfortable liquidity with most maturities due in 2022.- Novo Nordisk's entry into the capital will provide SYNLAB with a significant financial support.Weaknesses / Threats - - Tariff pressures related to the budgetary constraints of European countries.- High level of debt and fragile credit metrics due to an external growth strategy that suggests only a gradual improvement in credit metrics and ratings.- Limited pro forma history which implies a lack of visibility on results, particularly with regard to the generation of FCF. Credit opinion: Positive; Market recommendation: Neutral LABFP 6.25% 07/2022 and LABFP FRN 07/2022 - Buy LABFP 8.25% 07/2023 - We are adopting a Positive credit opinion on the issuer. SYNLAB operates in a buoyant market and is expected to maintain organic low-to-mid single digit growth over the next few years. Profitability should gradually be strengthened through the integration of recent acquisitions and those to come. In a largely fragmented market, the company intends to remain active on the M&A side with a view to strengthen its leading position in Europe. In addition to bold-on acquisitions, a structuring operation cannot be excluded. Ultimately, we believe that the group’s operating momentum should help gradually improve the company’s credit metrics and ratings. • We have a NEUTRAL recommendation on the senior secured LABFP 6.25% 07/2022. These are callable from 1 July 2018, offering a mid YTW of 1.9% at that date. Although it is below the average yield of 2.8% offered by our peer group, it is in line with that of the Altice 9% 2023 (1.8%), Douglas 6.25% 2022 (1.8%), Telenet 6.75% 2024 (1.5%) and UPC 6.75% 2023 (1.7%), bonds for which the probability of early redemption is high.• We have a NEUTRAL recommendation on the senior secured LABFP FRN 07/2022. Issued last November, the bonds saw their discount margin tighten quickly from 350bp to 255bp in two months. Moreover, its early repayment in November seems uncertain given the paper’s low margin vs. coupons of fixed-rate bonds. These should be refinanced as a matter of priority, unless anticipating a sharp increase in the underlying rates. With a YTM of 3.2%, they seem unattractive compared to the average yield of 5% of our comparable FRNs sample.  • We are assigning a BUY recommendation on the senior unsecured LABFP 8.25% 2023 notes. Rated Caa1 and B- respectively by Moody's and S&P, they offer a YTW of 4.5% vs. 3.7% on average for our peer group composed of subordinated bonds of equivalent quality and callable in 2018. The expected improvement in the company's operating profile prompts us to favor subordinated papers, especially as the bonds are attractive from a relative value perspective.