May 29, 2024 09:21 GMT
ISS Global (Baa3 S, BBB S) 5Y FV
CONSUMER CYCLICALS
€500m 5Y IPT MS+130a vs. FV +100.
**IPT coming tight to FV (-30). For equal carry Securitas (NR/BBB) also coming off a S&P upgrade and/or Pluxee (NR/BBB+) are alternatives (at FV). Screen cheap on ISS 26s & Pluxee 28s still stand.
- Not much new for us in the roadshow, summary for investors new to name; services co with main exposure in cleaning (42%) and rest split between technical services, food & other. Its Europe heavy (70%), contract renewal risk seems skewed to 2025 (30%), '27 (21%) & '28+ (26%). Capital allocation policies are clear (2-2.5x leverage target, 20-40% dividends from net profit, open to M&A, excess to buybacks) as are targeted headline metrics (4-6% organic growth, operating margin >5%, cash conversion on op. profit >60%).
- Key points from us previously; growth this year price driven as it exits unprofitable contracts, S&P ratings have headroom with top-end equity return assumptions, next earnings (1H in August) will show step up in leverage on FCF/WC seasonality, some issues with its biggest customer Deutsche Telekom on what it says are services unpaid for & expects DKK600m (€80m) cash from it next yr, FCF guidance next year at >DKK1.8b (>€241m) with shareholder returns at DKK1.4b (€188m) netting most of that.
- On FV, our closet comp is Sodexo but curve not a useful curve for RV (well tight on CSPP/French co). Securitas (NR/BBB) offers different services to business but has a very similar scale/near term growth. Higher margin leaves ~€150m more FCF/yr & runs similar S&P adj. leverage (mid to high 2xs by year end expected from both, Securitas targets <3x net).
- Given similarities, Securitas shorter March 29s at Z+96 are a floor for our FV, we spread a small +4bps for 3m term premium which leaves FV +7bps above interpolated Pluxee curve. Re the sector as a whole, pickup here from brewers while equal rated retailers still trade north (see new Pandora 30s) - latter seems fair given near-term outlook.
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