Eurofins Scientific Bonds Struggling after intial muted earnings reaction

Eurofins Scientific {ERF FP Equity +2%} (Snr; Baa3,BBB; S) equities holding firm after yesterday's sell-off while bonds that held unch yest. are moving +4-7 wider; reported cash flows for are a tad messy for credit read through in our view

Equity sell-off yesterday did seem exaggerated on a FY23 FCF miss given the above consensus FY24 guidance & long-term targets that were unch. Nothing significant in credit from us initially & cash lines seemed to agree, trading through it but are struggling a bit more today; mids +4-7bps wider.

Eurofins runs a low EBTIDA margin & a low cash conversion business (large capex) - this is all captured in its ratings & some what alleviated for leverage metrics that are against EBTIDA (its guiding to +13% growth this year) - though Moody's does keep an eye on cash flow conversion (vs. net debt >20%) which is also expected to grow 31% - but this is ex. investment in owned sites - FCFF in FY23 was €626m but capex & acquisitions left net €32m - in line with last year & as Moody's expected " mid-double digits range".

Moody's expects that to lift to €200m next year - this seems to work out given guidance of FCFF of €820m ex. investment in owned sites and net Capex (long-term) of €600m. But near-term guidance remains little unclear - its guiding to still elevated SDI's (~€125m unch on FY23) & high intensity of start-up activities (expansion capex was €229m last yr).

Hard to see concern for credit on leverage which is well within targets & should move lower on earnings growth. Refi risk shouldn't be a issue on the only maturity this yr - the €448m outstanding July line (€99.3) given its already been refinanced through the August '23 €600m Snr issuance. Another positive is halving of dividend (which is in line with required pay-out ratios for its rating) & Q&A showed mgmt actively watching leverage.

Hard to find close IG comps but against HY name IQVIA (Ba2, BB; S) its trading at historical tights - the 29's spread at 30bps - some of that was on broader index compression but we'd note that 1) level of tightness is not reflected in $ space & 2) IQVIA still screens on wide end against broader IG healthcare/pharama names (in line with VTRS & Bayer). No firm view from us on the curve here.