Increases in sub-contracting costs (+22% YoY) and personnel costs (+11% YoY) drove the overall cost base higher compressing the EBITDA margin slightly from 24.8% in FY 21 to 22.2% in FY 22. According to management, personnel costs increased not only due to wage inflation but also due to the increase in staff and personnel costs in strongly performing regions such as Western Europe, North America and for its larger Projects. On the other hand, subcontracting costs increased due to higher equipment-related and transport costs. 

Management on a conference call held on Tuesday (11/04/2023) was reluctant to provide FY 23 margins guidance on the call but emphasised their cost control and pass-thru measures. 

Topline diversification on track

Sarens has continued to reduce its dependance on the highly cyclical Oil & Gas end market ending the year with only 24% of revenues coming from the segment down from 48% in 2019 (see chart above). This transition was largely driven by the decline of the giant TCO Kazakhstan project in Oil & Gas. The winners in FY 22 were the clean energy sectors (on-/offshore wind and nuclear) whose share of the pie increased in FY 22. This reflects increased demand for cleaner energy, expected to continue for the foreseeable future and should support its pipeline. In particular, management expects offshore wind to be one of the major industries in the U.S. in the next five years and future nuclear projects in France to play a major role in potential new build contracts.

Management remains optimistic about Europe (>c.40% in FY 22 revenue) as good performance in Western Europe (mainly France and the UK) offset the €1m EBITDA drop for Belarus, Ukraine and Russia due to the conflict in the region. 

However, there wasn’t much movement in the drive to diversify away from major project revenue which fell from 22% to 21% of total revenue contribution on the back of the TCO project ramping down. As large projects tend to provide good visibility on fleet utilisation, a shift away could reduce visibility. However, management provided no colour around this.

As outlined in our Q3 22 review, the company continues to diversify away from South African markets to other African markets.

Working Capital improvement in Q4 not enough for FCF

Sarens’ FCF generation in recent years has been majorly influenced by swings in WC as EBITDA (€144.7m for FY 22) remained relatively stable while capex was constrained to €50m, the maximum capex covenant (for any four rolling quarters). Sarens need to demonstrate further deleveraging and healthy free cash flows before they are able to remove this cap, management agreed on the call. 

In line with Q3 22 guidance, Sarens managed to keep capex well under €50m, coming in at €39.3m for FY 22 down from €47m in FY 21 and FY 20 each. The focus was on replacing the ageing rental fleet with newer and more eco-friendly equipment. 

Due to delivery delays from equipment suppliers, some of the FY 22 capex got rolled over to FY 23 with management not ruling out a further delay to FY 24. Management don’t expect major improvements in supply chain in FY 23, especially around spare parts. However, they reassured investors they can switch to the second hand equipment if they can’t fix new equipment. 

It’s worth noting that while Sarens is capped on capex spend by its covenants, Loxam and Kiloutou, peers in the EU equipment rental market, invested heavily in their fleet during FY 22. 

In terms of WC, Sarens outdid itself in Q4 22 by generating a €10.6m w/capital inflow by reducing WC from €106.8m (17.6% of revenue) in Q3 22 to €75.1m (11.5% of revenue) at the end of FY 22. However, this couldn’t mitigate the large outflows seen earlier in the year putting w/capital consumption at -€41m for FY 22 — this remained the biggest headwind for Sarens’ operating cash flow. 

Management declined to provide w/capital guidance for FY 23 but did credit their Q4 22 WC improvement to weekly follow ups on invoicing and collections. That said, in FY 22 trade receivables topped €196m, a three-year high, so there is clearly more work to be done. See our Q3 22 review for a more in-depth analysis of Sarens’ WC swings, where we identified delayed revenue collections as the culprit.

Deleveraging through bond buybacks

Sarens net financial debt edged down to €664m in FY 22 from €674m in FY 21 though management is committed to de-leveraging further. To this end, today (12 April 2023) Sarens announced a tender offer to buy back up to a maximum of €30m of their €300m SUNs due 2027. This was done on the back of €8m worth of bond buybacks earlier in 2022.

FY 22 liquidity came in at €184m comprising €61.7m cash, €36.7m available under the revolving lease facility, and €86m available under the €118m RCF.

Sarens has a simple capital structure with most instruments (made up of €300m SUNs due 2027, revolving facilities, and bilateral leases and loans) being fixed rate. This has provided a cushion in light of the rising interest rates and kept interest costs were steady around €33m in FY 22.

With enough liquidity to cover lease and revolver payments, Sarens has no material maturities until 2027. Additionally, management says they have started discussions with banks to refinance their revolving facilities due early 2024.

Sarens’ net leverage ratio has been broadly stable at 4.6x-4.7x in the last three years. In FY 22 there was good headroom under the RCF net leverage covenant test of 5.6x , though headroom is likely to tighten when the test threshold drops to 5.2x in FY 23. Additionally the Net Senior Debt/LTM EBITDA came in well within its testing ratio of 3.25x (disclosed on the Q2 22 call, the test will remain at that level in 2023).