Many of you have been reaching out to comment and ask about the Multiple-Valuation approach on John Menzies plc (MNZS). Of course, there are some concerns about the cash-burning, and for that reason, here I address that in this short article.

Relying on the Q3 presentation, we know that:

  1. Available cash resources of over £175m at 31 August 2020
  2. Underlying operating cash flow ahead of expectations with good debtor collections and upfront support from governmental agencies
  3. In January, the Company completed the refinance of the Group’s bank facilities that were due to mature in 2021 and replaced them with a US$235m amortizing loan and a £145m revolving credit facility, both due to mature in January 2025.
  4. The new covenant structure’s critical terms foresee net leverage covenant replaced with a minimum EBITDA covenant tested on a quarterly basis. The Group must keep a minimum of £45m liquidity. The new covenant structure will remain in place until the earlier of June 2022 or whenever the Group’s leverage as measured on a pre-IFRS 16 basis remains below 3.0 times for three consecutive quarters.

Based on the above points, we know the Company has addressed the liquidity issue and has renegotiated covenants. Now the question is whether these measures are enough to support the Company during the pandemic.

Still, from the Q3 presentation, we know that:

  1. Market conditions will remain challenging through the winter and the early part of next year, but expect a sustainable recovery in activity levels after that, contributing to modest revenue growth in 2021 over 2020

Assuming a liquidity level around GBP 150mln by the end of 2020 and a cash-burning between GBP 7mln and GBP 12mln per month, we believe Menzies might breach the liquidity covenant over the next 9 to 15 months.

Source: Our estimates

What happens in case covenants are breached?

There are three possible scenarios:

  • The most likely scenario is that covenants are renegotiated as the banking system proved to be supportive of Menzies.
  • Menzies might be forced to look for a share capital increase and/or possible asset disposal to reduce its debt exposure.
  • A mix of the above two scenarios

A prolonged lockdown scenario is clearly the major risk we see for Menzies shareholders as it might force Menzies to look for a dilutive share capital increase that might occur at a substantial discount to the current share price (227p as of 19 January 2021).

That said, we share Menzies management view for the long term as we expect “Menzies to emerge as a more efficient, agile and profitable business with a more focused footprint having exited stations that are no longer economically viable.”

Actions to be taken

It is crucial to continue monitoring disclosures on liquidity levels. Suppose we do not see a recovery in the level of activities for Menzies by the late summer period (which also carries a positive seasonality). In that case, we might eventually consider reducing our position as the probability of the events mentioned above increases over time.

MNZS Chart

About Antonio Velardo

Antonio Velardo is an experienced Italian Venture Capitalist and options trader. He is an early Bitcoin and Ethereum adopter and evangelist who has grown his passion and knowledge after pursuing the Blockchain Strategy Programme at Oxford University and a Master’s degree in Digital Currency at Nicosia University.

Velardo manages an 8-figure portfolio of his investment company with a team of analysts; he is a sort of FinTweet mentor, people interact with him online, and he has more than 40,000 followers after his tweets. He has built a fortune in the great tech years and put together a tail strategy during the pandemic that allowed him to take advantage of the market drop. “I did not time the market, and I did not think this was even a black sworn,” he says.

On the side of the financial markets, Velardo has a unique combination. He was a real estate entrepreneur that developed several projects in Tunisia, Miami, Italy, the UK, and many other countries and cities. But he has always been passionate about options trading. Still, contrary to the volatility player and quant trading, he always had a value investing touch in his blood. Antonio studied Value Investing at Buffet’s famous business school at Columbia University. Even though the central concepts of value investing are antagonists to the venture capital pillars, Antonio’s approach tries to bridge elements of both worlds in order to seek alpha. Velardo has learned the importance of spotting pure growth stories and taking advantage of their S-Curve position. This is an essential element of Velardo’s approach as he looks forward to embracing great tech stories at the right time of the adoption cycle. This applies to stocks but also to blockchain projects.