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On 24/04/2024, Intrum AB (OTCPK:ITJTY) (OTCPK:INJJF) released its Q1 trading results. The Swedish Credit Management Services company operates in 20 European countries and is organized into two operating divisions: servicing and Investing. Last time, we positively commented on the Cerberus transactions as a step forward to reassure Wall Street. Looking at the broader picture, the Credit Management Services sector has changed radically. After the ECB requests to clean banks’ assets, almost all large and medium-sized banks concluded partnership agreements with specialized operators, outsourcing a large part of the NPL recovery. There is less room for maneuvering for servicers, and now it is time for business integration (DoValue and Gardant) or balance de-risks activities (Intrum – Cerberus deal). Despite that, the Intrum servicing unit business remains a low-margin business. Having said that, we believe the company’s share price discounts the balance sheet risks, and we started our initiation of coverage with a neutral rating.
Q1 Results and Earnings Changes
Cross-checking Wall Street consensus estimates, the company delivered an adjusted core operating profit of SEK 1.15 billion and 3.1% lower vs. analysts forecast. Sales were in line and reached SEK 4.89 billion, with the adjusted EBIT miss mainly driven by higher expenses. Looking at the details, the company’s expenses increase to SEK 3.94 billion due to the ongoing one-off activities on the cost saving program. Going down to the P&L analysis, cash generation (cash EBITDA) was slightly better than anticipated, and Intrum delivered SEK 2.8 billion with net financial items at SEK 0.1 billion. On a divisional basis, the Servicing sales were solid; however, we continue to see this negative downward trend on the core operating profit margin (Fig 1).
After a quarter, Intrum leverage remained unchanged at 4.4x due to a 0.1x unfavorable currency movement (Fig 2). The company is on the path of three strategic priorities: 1) Ophelos operational in the Netherlands, 2) additional savings for a total amount of SEK 700 million in 2024/25, and 3) debt capital management. The company aims to “become increasingly client-centric and capital-light while pursuing an operating model driven by technology and automation.”
Intrum Servicing Division core operating profit margin evolution
Source: Intrum Q1 results presentation – Fig 1
Intrum net debt development
Fig 2
Having said that, the recently announced capital structure review remains ongoing, and no additional information was released during the Q1 results or during the Analyst’s call. Once again, the company has available liquidity to repay approximately 90% of outstanding 2024/25 financial debt maturities. For the 2026 debt, Intrum needs to refinance and/or extend parts of its outstanding debt. Quoting the CEO, “The review is ongoing, and we are considering all options.” Here at the Lab, we believe a bond strategic review will be ahead of the 2024 bond maturity in July.
On a positive note, the company identified incremental cost savings. Already in Q4, the company flagged an increased ambition to reduce operating expenses. We believe Wall Street analysts were already incorporating this path. Looking at the original plan, the company cost savings (Fig 3). This brings the total savings to SEK 1.5 billion by 2025.
For this reason, our model shows more upside to date than we previously forecast. Post Q1, here at the Lab, we increased by SEK 250 million to SEK 5.15 billion. In detail, we are below management targets. In numbers, additional cost savings for 2024 were estimated at SEK 400 million. That said, our EPS moved from SEK 9.5 to SEK 10.4.
Intrum’s additional cost saving plan
Fig 3
Valuation
The company’s shares have dropped by approximately 80% over the past year and currently trade at a depressed 2024 price-earnings of 2.14x. In our view, this means that investor concerns are already discounted in Intrum share price. Looking back, Intrum shares used to trade at an 8x P/E. Even assuming a negative terminal growth rate of -2%, this company has a 25% core operating margin target and should be valued accordingly. That said, we retain our equal weight rating and see significant dependence on bond markets. Deleveraging work and turnaround execution are paramount for Intrum equity value preservation.
Risks
The downside risks are multiple: regaining capital markets access with the ability to raise debt, higher than anticipated financing costs, higher-for-longer interest rate, regulatory changes from the ECB, higher cash-on-cash multiple of purchased debt, lower core operating profit from the Servicing division, and Intrum’s failure to execute its strategic plan. In addition, we should also include Intrum’s main shareholder (Nordic Capital), who controls almost 40% of the company’s equity stake and is no longer under any lockup.
Conclusion
The company’s stock has performed poorly recently, with questions around Intrum’s ability to repay its financial debt. We believe Intrum new investors should also price high volatility due to the uncertainty around potential capital markets access outcomes. For this reason, we maintain a neutral view and are cautious in terms of risk/reward appetite.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
