The goal of a 4-6% EBITDA margin is a mid-term target that implies 30% lower earnings capacity than previously perceived. This means there is less room for error as setbacks now have a larger impact. Mgt. expects to reach the low end by 3Q14 (run-rate). Restructuring is needed to get to 4-6% as the Dutch and German markets are tough, while Germany suffers from charity by its former mgt., which loved to spend on football clubs and other beneficiaries that had no direct relationship with the business. The impairment test suggests that mgt. expects a Benelux margin of 2.3% by 2015.
WC at end-2012 was unsustainably favourable:
It benefited circa € 100-125m from unsustainably favourable staffing-related liabilities that should unwind. The latter happened to some extent in 1Q13 as WC deteriorated sequentially by € 362m, o.w. € 287m from seasonality. Acc. to mgt., WC is circa € 200m higher during the year than at year-end, also mid-year, unlike historical data that show only € 110m deterioration mid-year.
Net debt on the rise as large amounts of cash costs will be made:
Net debt of € 1,220m at end 1Q13 will grow due to € 170m cash outflow from operational (80) and financial restructuring (90 out of 110, 20 was expensed in 1Q13) to € 1,400m. Minus € 500m from the rights issue leads to € 900m. That leaves the operational results, WC, provisions, and capex, for (de)leveraging. Let’s assume net debt at end-2013 of € 800m. A goal of at most 2x net debt/EBITDA implies EBITDA of € 400m. Mgt. expects sales to be organically flat in 2013 so let’s assume € 5,500m. The target EBITDA range of 4-6% implies EBITDA of € 220-330m which is insufficient, especially since mgt. indicated they expect to reach the low end of the 4-6% range by 3Q14 (run-rate). This suggests a FY 2014 margin of <4%. That leaves relatively little EBITA for further deleveraging, which thus has to be enhanced by improvements on WC.
The extent of dilution from the € 500m rights issue is still unknown:
The issue is backed by Rabo and ING, but against which price is not yet known. Risk is on the rise with respect to the extent of dilution.
Potential litigations:
Management emphasised that the company could potentially face litigations from shareholders, clients, or others. Imtech, on the other hand, will also try to get compensation from third parties that they believe have wronged the company. This may include the former managers in Germany and Poland.
Estimates and TP lowered:
The 1Q13 results disappointed and the path to recovery seems to be longer than expected for Benelux and Germany. The € 110m damage re financial restructuring was also a new setback. We lower our TP to € 6, but we flag downside risk from a potential delay in margin recovery and especially from additional dilution from the upcoming rights issue.