B2HOLDING In compliance with covenants B2Holding’s Q4 report showed a continuation of softer collections than we expected and an increasing cost base. One positive was that the company is now back in compliance with its debt covenants (equity ratio >25%) with an equity ratio of 25.2%. We have reduced our 2020–2021e EPS by 3%, and in turn our target price to NOK9 (10). We reiterate our BUY, and find the stock attractively valued at a 2021e P/E of 7x.
Lower amortisation supported the Q4 results. Gross collections were NOK1,295m, below the quarterly run-rate of NOK1,325m implied by the ERC for the next 12 months given at end-Q3. We regard this as somewhat more concerning when also considering that Q4 should normally be a seasonally strong quarter. Along with lower gross collections than we expected, the amortisation rate was lower than in Q3 (46.5% in Q4 versus 49.3% in Q3). We believe the amortisation rate should converge towards a level of 60% in the coming year, and estimate that a more normalised amortisation rate in Q4 would have reduced the pre-tax profit by some NOK50m.
Total costs were some 4% higher than we forecast and 10% above consensus. An impairment of IT assets of NOK21m and intangible assets of NOK5m (the two impairments constituted 5% of costs in Q4) only partly explain the miss. The equity ratio was back at above 25% at end-Q4.
B2Holding said it currently has NOK2.1bn in investment capacity and that the cash flow from its collections is likely to take capex in 2020 to a level similar to 2019 (NOK~4bn). We estimate NOK3.1bn of new portfolio investments in 2020. The lower level is a result of us expecting a 5% lower level of gross collections than implied by the company’s ERC. Management said that 2020 will be a transition year with focus on implementing its strategy and focus on more servicing and forward flows.
Estimates reduced marginally. We have reduced our 2020–2021e EPS by 3% as a result of a marginally lower ERC in Q4 than we had forecast.
BUY reiterated, but target price lowered to NOK9 (10). We reiterate our BUY on B2Holding as we find the stock attractively valued at a 2021e P/E of 7x. We see potential upside to our estimates and the market’s expectations if the company can collect anything close to its ERC guidance. We welcome B2Holding’s new strategy of focusing more on capital-light third-party collection revenues. However, we acknowledge that such a strategic shift is likely to take several years to materialise in the reported numbers. We also welcome the strategic shift towards focus on fewer countries. However, we note that this transition is also likely to take several years to be implemented fully and yield the desired economies of scale in the remaining locations.