Loxam is the leading European equipment rental group, boasting a sizable market share (18 per cent) in its core market, France. It is now present in 13 countries after having first entered the international market in 1996.
The business model is reliant on a network of branches (over 600) which should enable the company to provide tailored services to the local players. What is more, the company asserts that it is one of the two largest players in most of the regions and metropolitan areas where it is active.
It has a long history, having been established in 1967 and it remains a private company, owned mainly by its management team. The biggest shareholder, with a 75 per cent stake, is Gerard Deprez, Loxam’s CEO.
The company offers over 1,000 different types of generalist and specialist equipment and holds a rental fleet of about 180,000 pieces of equipment. Major equipment types are: earth moving (31 per cent), aerial platforms (21 per cent), building (12 per cent), handling (11 per cent), energy (10 per cent), compaction (nine per cent) and modular (six per cent).
Loxam stands out with a good track record in terms of financial results as it reportedly never incurred an annual loss and continuously met the debt covenants.
Indeed, even though the macro economic conditions were a challenge over the last few years (especially 2009), Loxam was fast in reducing capital expenses (Capex), shielding its cash holdings by disposing assets and revising the cost base.
Capex was scaled down over 2009-2012, with an increase reported in 2013-2014 in preparation of improving market conditions. What is more, the company took advantage of the continuously positive operating cash flow (CFO) to scale down debt in 2009-10.
The gross and EBITDA margins have been stable over the last few years notwithstanding their high levels and a mild recovery was reported in 2014 and early 2015.
The improvement came as the company has worked to streamline its costs structure but reducing the complexity of its corporate structure and adopting an enterprise resource planning (ERP) system (the implementation of which was completed in 2013). However, the growth in EBITDA also relates to the acquisitions made over 2014 and the higher capital gains from fleet disposals.
Although operating cash flow (CFO) improved significantly over 2014, the free cash flow (i.e. CFO less capital spending) deteriorated given a 40 per cent increase in investments.
As I touched upon earlier, the increase in capex came after several years of only marginal asset replacements and reflected the company’s efforts to remain competitive and to be prepared for a strengthening in economic growth.
For 2015 the management guided towards lower capex reckoning that market conditions warrant a prudent approach and voicing their expectations for a “further decrease of construction but stable rental market” in France. The results for Q1 2015 indeed showed much lower investments and a return to positive free cash flow (i.e. cash generation).
Looking forward, France remains the weak link with decline in top line seen as the most likely scenario. For international operations, the growth expectations are fairly high with the UK and other Northern countries positioned for growth. This, together with the cost cutting efforts, should support profitability and lead to stable leverage metrics.
The company has three bonds outstanding, out of which two are subordinated and one is senior secured. I see better value in the secured bond 4.875 per cent Loxam 2021 and, for investors with greater risk appetite, in the unsecured bond 7.375 per cent Loxam 2020. Of note, given the greater seniority of the former, its holders are in a less leveraged position (i.e. 1.45x EBITDA versus 3.45x EBITDA).
This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.