Review Credit Research 29 May 2015

Transcription

1 Review Credit Research 29 May 215 Norsk Gjenvinning AS B+ Industry (GICS): Commercial Services & Supplies Negative Sector (Nordea): Business Services Key info Country Bloomberg debt Bloomberg equity Moody's S&P Market cap. (bn) Norway VVHLDG Corp Z NO NR/--- NR/--- n.a. Nordea Markets - Analysts Lars Kirkeby Chief analyst, Credit lars.kirkeby@nordea.com Mark Schindele Chief analyst, Credit mark.schindele@nordea.com Sales by business area - YTD 215 Industry and Offshore 15% Metal 25% Household Collection 9% Recycling 51% Weaker than expected in Q1 215 Norsk Gjenvinning posted Q1 215 earnings below our expectations, hampered by lower gross margins and increased personnel expenses. The credit profile became more stretched and the group's book equity ratio continued to slide. Consequently, we maintain our Underperform recommendation on the group's bond debt. Q1 215 earnings below our expectations Norsk Gjenvinning posted Q1 215 earnings below our expectations, impacted by lower gross margins and increased personnel expenses. Turnover grew y/y by 4%, while clean EBITDA declined by 19% and the overall clean EBITDA margin weakened to 6.7% (Q1 214: 8.6%). Stretched credit profile, with declining equity ratio Norsk Gjenvinning's adjusted net debt (including pension liabilities) increased during the quarter, mainly due to seasonally lower operating cash flow. Hence, the net debt/ebitda (12-month rolling) and total debt/ capitalisation ratios weakened to 7.3x and 93% (Q4 214: 6.6x and 91%), respectively. Furthermore, the group's reported book equity ratio ended the quarter at 5.5%, down from 6.5% as of end Q The adjusted equity ratio, including a NOK 128.5m subordinated shareholder loan, stood at 9.2%. Revenue and EBITDA, NOKm e 216e 217e 12% 1% 8% 6% 4% 2% % Credit view We maintain our shadow rating on Norsk Gjenvinning at B+ with a Negative outlook, reflecting our assessment of a Fair business risk profile and an Aggressive to Highly Leveraged financial risk profile. The Negative outlook reflects our concerns of continued cost pressure, which may lead to downward pressure on the financial profile. Revenue EBITDA EBITDA margin Key credit metrics and ratios (adjusted numbers) NOKm E 216E 217E EBITDA margin n.m. n.m. n.m. n.m. 11% 1% 8% 8% 1% 1% EBIT margin n.m. n.m. n.m. n.m. 5% 4% 2% 2% 3% 3% Shareholders' equity Debt 2,66 2,331 2,425 2,481 2,481 2,481 Debt/(Debt+Equity) n.m. n.m. n.m. n.m FFO/Debt n.m. n.m. n.m. n.m. 14.5% 18.1% 13.5% 14.1% 15.9% 17.1% FOCF/Debt n.m. n.m. n.m. n.m. 6.1% 3.6% 4.7% 3.2% 5.1% 5.% DCF/Debt n.m. n.m. n.m. n.m. 6.1% 3.6% 4.7% 3.2% 5.1% 5.% EBITDA interest coverage n.m. n.m. n.m. n.m Debt/EBITDA n.m. n.m. n.m. n.m ROC n.m. n.m. n.m. n.m. 16.2% 6.6% 3.1% 3.% 4.8% 5.6% IMPORTANT INFORMATION AND DISCLOSURES AT THE END OF THIS REPORT Markets

2 Weaker than expected in Q1 215 Norsk Gjenvinning posted Q1 215 earnings below our expectations, hampered by lower gross margins and increased personnel expenses. The credit profile became more stretched and the group's book equity ratio continued to slide. Q1 215 earnings below our expectations Seasonally weak operating cash flow Norsk Gjenvinning posted Q1 215 earnings below our expectations, impacted by lower gross margins and increased personnel expenses. Turnover grew y/y by 4%, while clean EBITDA declined by 19% and the overall clean EBITDA margin weakened to 6.7% (Q1 214: 8.6%). The group s turnover benefitted from increased volumes, but earnings were negatively affected by a shift in volumes from high-margin waste fractions to lower margin waste fractions, as well as a decline in paper and ferrous prices. The group s operating cash flow came in at NOK 3m (Q1 214: negative). Normally, the operating cash flow in the first quarter is weak due to seasonal increase in trade receivables and decrease in trade payables. The group s capital expenditures amounted to NOK 3m. Of this, NOK 5m represented expansion capex, while NOK 25m were maintenance capex. The cash balance declined by NOK 63m during the quarter, ending at NOK 98m. Revenue and EBITDA, NOKm FFO and total debt, NOKm e 216e 217e 12% 1% 8% 6% 4% 2% % e 216e 217e 2% 15% 1% 5% % Revenue EBITDA EBITDA margin FFO Total debt FFO/Total debt Cost-cutting program (NG2) In September 214, Norsk Gjenvinning decided to implement a number of cost-cutting measures to deal with excess capacity in several of the group's businesses. These measures included general cost reductions, reduced workforce and optimisation of the plant footprint through a cut in the number of plants. The goal of the cost-cutting programme, called NG2, is a net improvement to the group's results by a minimum of NOK 2m over the next 24 to 36 months. According to the management, the cost initiatives are being implemented according to plan. Liquidity reserve The group s liquidity reserve as of quarter-end amounted to NOK 298m, comprising NOK 98m in cash at hand and NOK 2m of undrawn credit facilities. Credit profile deterioration Norsk Gjenvinning's adjusted net debt (including pension liabilities) increased by NOK 118m during the quarter, ending at NOK 2,382m (Q4 214: NOK 2,264m). The net debt/ebitda (12-month rolling) and total debt/capitalisation ratios weakened further due to reduced earnings, ending at 7.3x and 93% (Q4 214: 6.6x and 91%), respectively. Nordea Markets 2

3 Net debt and EBITDA, NOKm Total Debt, NOKm and % e 216e 217e e 216e 217e 12 % 1 % 8 % 6 % 4 % 2 % % Net debt EBITDA Net debt to EBITDA Total debt Total debt to capitalisation Weak book equity ratio Management guidance for 215 The group's reported book equity ratio ended the quarter at 5.5%, down from 6.5% as of end Q The adjusted equity ratio, including a NOK 128.5m subordinated shareholder loan, stood at 9.2%. However, the shareholder loan is not eligible for equity treatment according to rating methodology. In our estimates going forward, we see continued negative pressure on the group's book equity and estimate the ratio will slide further, to 3.7% as of year-end 215. Norsk Gjenvinning expects 215 revenues to come in flat compared to 214. Overall, management expects downward pressure on gross margins, and focus will be on cost reductions. Maintenance capex is expected to amount to approximately NOK 16m, but there is no guidance on expansion capex. Nordea Markets 3

4 Segment performance Four core business areas The group has four core business areas: Recycling Metal Industry & Offshore Household Collection Sales by business area (excluding non-core business operations) Household Collection 9% EBITDA by business area (excluding non-core business operations) Household Collection 13% Industry & Offshore 15% Industry & Offshore 13% Recycling 28% Recycling 51% Metal 25% Metal 46% Three of four segments delivered weaker margins y/y Segment Recycling, NOKm YTD-15 Sales EBITDA EBITDA margin Segment Metal, NOKm YTD-15 Sales EBITDA EBITDA margin 2% 15% 1% 5% % 16% 14% 12% 1% 8% 6% 4% 2% % The Recycling, Industry & Offshore, and Household Collection segments all delivered weaker margins y/y in Q1 215, while the Metal segment generated improved earnings. The Recycling segment is engaged in the collection, sorting and treatment of mixed industrial waste, paper, plastics, wood chips and other nonhazardous waste fractions. Operation of municipal recycling stations is a focus area for the business segment. The Recycling unit reported turnover of NOK 456m (Q1 214: NOK 453m) with segment EBITDA of NOK 21m (Q1 214: NOK 48m), corresponding to an EBITDA margin of 4.6% (Q1 214: 1.6%). The decline in EBITDA was due to internal restructuring, change in product mix to lower-margin volumes, a decline in commodity prices, cost-cutting implementation costs and somewhat higher operating costs. The Metal segment is engaged in the collection, sorting and shredding of ferrous and nonferrous materials (including cars and electrical equipment) into higher-quality fractions. The Metal segment reported turnover of NOK 228m (Q1 214: NOK 219m) with segment EBITDA of NOK 34m (Q1 214: NOK 25m), corresponding to an EBITDA margin of 15.1% (Q1 214: 12.%). The segment profitability was positively affected by increased volumes and lower operating costs. Nordea Markets 4

5 Segment Industry & Offshore, NOKm YTD-15 Sales EBITDA EBITDA margin 2% 15% 1% Segment Household Collection, NOKm YTD-15 Sales EBITDA EBITDA margin 5% % 16% 14% 12% 1% 8% 6% 4% 2% % The Industry & Offshore segment is occupied with cleaning and processing services on site and collection, repackaging and reloading of hazardous waste. Project-based industrial cleaning services and collection/ handling of bulk hazardous waste are also included in its activities. The Industry & Offshore segment reported turnover of NOK 134m (Q1 214: NOK 164m) with segment EBITDA of NOK 9m (Q1 214: NOK 17m), corresponding to an EBITDA margin of 7.% (Q1 214: 1.1%). The segment was negatively impacted the closure of hazardous waste disposal at Mongstad. The Household Collection segment is a pure logistics area, engaged in collection and transportation of household waste with no ownership or treatment of waste volumes. The Household Collection segment reported turnover of NOK 83m (Q1 214: NOK 78m) with segment EBITDA of NOK 9m (Q1 214: NOK 11m), corresponding to an EBITDA margin of 11.3% (Q1 214: 14.5%). The segment reported higher turnover due to start-up of new contracts and index adjustments of existing contracts. Nevertheless, the growth in operating revenues was offset by increased costs. Nordea Markets 5

6 Credit profile considerations Supportive business risk profile elements Challenging business risk profile elements Fair business risk profile The business risk profile is supported by: It being Norway's leading waste management company, with an overall domestic market share of around 25% Attractive market fundamentals and outlook Strong customer diversity Broad geographic coverage and strong local presence. The business risk profile is challenged by: Exposure to a highly fragmented and less transparent industry Contract risks, as the group's operations are contract-based to a large extent, with an average contract duration of about two years Relatively high capital intensity for a service business Highly Leveraged financial risk profile. We are of the opinion that the overall business risk profile associated with Norsk Gjenvinning can be considered Fair, according to the "expanded rating matrix" below from Standard & Poor's. Expanded Rating Matrix - Financial Risk Profile - Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly Leveraged Excellent AAA/AA+ AA A+/A A- BBB BBB-/BB+ Strong AA/AA- A+/A A-/BBB+ BBB BB+ BB Satisfactory A/A- BBB+ BBB/BBB- BBB-/BB+ BB B+ Fair BBB/BBB- BBB- BB+ BB BB- B Weak BB+ BB+ BB BB- B+ B/B- Vulnerable BB- BB- BB-/B+ B+ B B- Core ratios Supplementary coverage ratios Supplementary payback ratios FFO/Debt (%) Debt/EBITDA (x) FFO/Interest (x) EBITDA/Interest (x) CFO/Debt (%) FOCF/Debt (%) DCF/Debt (%) Minimal > 6 < 1.5 > 13 > 15 > 5 > 4 > 25 Modest Intermediate Significant Aggressive Highly Leveraged < 12 > 5 < 2 < 2 < 1 < 5 < 2 Source: Standard & Poor's Aggressive to Highly Leveraged financial risk profile Adjusting reported debt for pension liabilities Our opinion is that the financial risk profile associated with Norsk Gjenvinning can be considered as Aggressive to Highly Leveraged, with emphasis on Highly Leveraged. According to the guidelines from S&P, we evaluate credit ratios on a time-series basis, and we consider the group's credit ratios for the previous two years as well as the current year's forecast. We adjust Norsk Gjenvinning's reported debt by adding pension liabilities. Nordea Markets 6

7 Bond details Ticker Issuer Corp Bond Issue Maturity Coupon Size (m) Rank NG 7/19 VV Holding AS B+ B N3M +525 NOK st priority pledge Indicative trade level(s) Key bond details Call option structure Selected bank debt details The group's 219 bond is currently indicated (mid-price) at 1. (spread to swap +525 bp). First lien in inventory, machinery and plant and shares in subsidiaries Put option at 11% if the bonds are not listed by 1 July 215 Put option at 11% if a change of control event occurs The change of control event is triggered if any entity other than Altor gains control of a majority of the shares Incurrence test is met if net debt/ebitda is not greater than i) 5.x prior to the date falling 18 months after issue date, ii) 4.5x prior to the date falling four years after issue date and iii) 4.x thereafter. At the sum of 1.% and the applicable premium up to July 216 At % from July 216 up to July 217 At % from July 217 up to July 218 At % thereafter. NOK 2m revolving credit facility, undrawn as of 31 March 215 NOK 27m leasing facility, of which NOK 68m was drawn as of 31 March 215. Nordea Markets 7

8 Reported numbers and forecasts Income statement NOKm E 216E 217E Total revenue 4,74 4,151 4,136 4,13 4,388 4,52 - growth n.a. n.a. n.a. n.a. n.a. 1.9% -.3% -.8% 7.% 3.% Gross profit 1,874 2,36 2, margin n.m. n.m. n.m. n.m. 46.% 49.1% 51.% 19.% 9.5% 1.% EBITDA margin n.m. n.m. n.m. n.m. 1.6% 9.8% 8.2% 8.4% 9.5% 1.% EBITA margin n.m. n.m. n.m. n.m. 1.6% 9.8% 8.2% 8.4% 9.5% 1.% EBIT margin n.m. n.m. n.m. n.m. 5.2% 4.3% 2.% 2.% 2.8% 3.1% Net finance Pre-tax profit Taxes Net profit, continuing operations Discontinued operations Net profit to equity EBITDA (credit adj) EBIT (credit adj) Interest expense (credit adj) Balance Sheet NOKm E 216E 217E Goodwill Other intangibles 1,429 1,465 1,418 1,43 1,43 1,43 Tangible assets 923 1,31 1,89 1,64 1,82 1,112 Shares associates Interest bearing assets Deferred tax assets Other non-interest bearing non-current assets Other non-current assets Non-current assets 2,396 2,572 2,646 2,582 2,6 2,63 Inventory Accounts receivable Other current assets 117 Cash and cash equivalents Current assets 1, ,7 1,132 1,257 Assets held for sale Total assets 3,447 3,544 3,568 3,589 3,732 3,887 Shareholders equity Minority interest Deferred tax Convertible debt Long term interest bearing debt 2,58 2,199 2,419 2,36 2,36 2,36 Non-current liabilities Pension provisions Other long-term provisions Other long-term liabilities Non-current liabilities 2,3 2,41 2,685 2,594 2,594 2,594 Short-term provisions Accounts payable ,222 Other current liabilities Short term interest bearing debt Current liabilities ,97 1,34 Liabilities for assets held for sale Total liabilities and equity 3,447 3,544 3,568 3,589 3,732 3,887 Cash and cash eq (credit adj) Total assets (credit adj) 3,447 3,544 3,568 3,589 3,732 3,887 Shareholders equity (credit adj) Debt (credit adj) 2,66 2,331 2,425 2,481 2,481 2,481 Nordea Markets 8

9 Cash flow statement NOKm E 216E 217E EBITDA Adj due to change in group structure Change in Provisions Other non-cash adjustments Net financials Dividends received Paid taxes Other Operating cash flow before NWC Change in NWC Operating cash flow CAPEX Free operating cash flow Dividends paid Share issues / buybacks 89 2 Discretionary cash flow Other investments / divestments Other Proceeds from sale of assets Net change to group borrowing/repayments Other Change in cash Adjusted metrics Funds from operations (FFO) (adj) Operating cash flow (OCF) (adj) Free operating cash flow (FOCF) (adj) Discretionary cash flow (DCF) (adj) Key ratios Profitability E 216E 217E ROC n.m. n.m. n.m. n.m. 16.2% 6.6% 3.1% 3.% 4.8% 5.6% ROIC after tax n.m. n.m. n.m. n.m..%.%.%.%.%.% ROE after tax n.m. n.m. n.m. n.m. 1.7% 1.1% -57.3% -58.9% % 516.5% Debt & Interest coverage E 216E 217E FFO/Debt n.m. n.m. n.m. n.m. 14.5% 18.1% 13.5% 14.1% 15.9% 17.1% FOCF/Debt n.m. n.m. n.m. n.m. 6.1% 3.6% 4.7% 3.2% 5.1% 5.% DCF/Debt n.m. n.m. n.m. n.m. 6.1% 3.6% 4.7% 3.2% 5.1% 5.% EBITDA interest coverage n.m. n.m. n.m. n.m FFO cash interest coverage n.m. n.m. n.m. n.m Leverage E 216E 217E Debt/EBITDA n.m. n.m. n.m. n.m Equity ratio n.m. n.m. n.m. n.m. 13.8% 9.5% 6.2% 3.3%.7% -1.6% Debt/(Debt+Equity) n.m. n.m. n.m. n.m Capital expenditure E 216E 217E CAPEX/Depreciation and amortisation n.m. n.m. n.m. n.m CAPEX/Sales n.m. n.m. n.m. n.m Working capital ratios E 216E 217E Inventory turnover (days) n.m. n.m. n.m. n.m Receivables turnover (days) n.m. n.m. n.m. n.m Days sales outstanding (days) n.m. n.m. n.m. n.m Per share data E 216E 217E EPS EPS (adj.) DPS BVPS n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. Equity valuation and yield E 216E 217E Market cap. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Enterprise value n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. P/E n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. P/BV n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. EV/Sales n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. EV/EBITDA n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Dividend yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Payout ratio n.m. n.m. n.m. n.m..%.%.%.%.%.% Nordea Markets 9

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11 Analyst Shareholding Nordea Markets analysts do not hold shares in the companies that they cover. No holdings or other affiliations by analysts or associates. Market-making obligations and other significant financial interest Nordea Markets has no market-making obligations in Norsk Gjenvinning AS Recommendation definitions Outperform Over the next three months, the fixed income instrument's total return is expected to exceed the total return of the relevant Market perform Over the next three months, the fixed income instrument's total return is expected to be in line with the total return of the relevant Investment banking transactions Nordea Markets has no ongoing or completed public investment banking transactions with Norsk Gjenvinning AS In view of Nordea s position in its markets readers should however assume that the bank may currently or may in the coming three months and beyond be providing or seeking to provide confidential investment banking services to the company/companies Underperform Over the next three months, the fixed income instrument's total return is expected to be below the total return of the relevant All research is produced on an ad hoc basis and will be updated when the circumstances require it. Distribution of recommendations Recommendation Count % distribution Outperform 88 17% Market perform % Under perform 14 27% Total 512 1% As of 1 January 215 Issuer Review This report has not been reviewed by the Issuer prior to publication. Nordea Bank AB (publ) Nordea Bank Danmark A/S Nordea Bank Finland Plc Nordea Bank Norge ASA Nordea Markets Division, Equities Nordea Markets Division, Equities Nordea Markets Division, Equities Nordea Markets Division, Equities Hamngatan 1 Strandgade 3 (PO Box 85) Aleksis Kiven katu 9, Helsinki Middelthuns gate 17 SE Stockholm DK-9 Copenhagen C FI-2 Nordea N-368 Oslo Sweden Denmark Finland Norway Tel: Tel: Tel: Tel: Fax: Fax: Fax: Fax: Reg.no Reg.no Reg.no Reg.no Stockholm Copenhagen Helsinki Oslo