DBRS Morningstar Confirms Ratings on Elis S.A. at BBB (low), Stable Trends

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes rating on Elis S.A. (Elis or the Company) at BBB (low) with Stable trends. The rating confirmations reflect DBRS Morningstar’s view that Elis has largely recovered from the Coronavirus Disease (COVID-19)-related disruptions and exhibits credit metrics that are commensurate with the current ratings.

Toward the end of 2021, Elis’ credit metrics largely recovered from somewhat weaker levels caused by the long-lasting effects of the pandemic. Travel restrictions and lockdowns had affected Elis’ hospitality segment most heavily, until recently in 2021 and early 2022, as new variants continued to force some governments to limit international travel and constrain capacity in the hospitality sector. The Company’s diversification in terms of its customer base and end markets as well as its ability to capture new business opportunities, such as cleaning and disinfection services, helped to partially compensate for the loss of revenues. The Company’s 2021 revenues were only about 7% below those in 2019, therefore making up about 50% of the pandemic-induced loss of revenues. Elis’ revenues in 2022 are set to surpass levels in 2019 due to the catchup effect in the hospitality sector. The Company’s EBITDA and free cash flow (FCF; as defined by DBRS Morningstar) continued to improve in 2021 compared with 2020, showing resilience in the Company’s variable cost structure during uncertain times. In 2022, DBRS Morningstar expects Elis’ financial performance and credit metrics to continue to improve, consistent with the current ratings, but cautions that the impact of raw material, energy, and wage inflation as well as geopolitical turbulence could all have an adverse effect on margins, FCF, and the overall demand environment. DBRS Morningstar notes that while Elis has a presence in Russia, it is small overall and represents less than 1% of total revenues. Further, DBRS Morningstar notes that Elis recently announced an acquisition in Mexico, a new market for the Company, which it plans to fund with a mix of cash on hand and debt. Due to its size (approximately EUR 157 million), the acquisition could inherently represent both integration and financial risks, but DBRS Morningstar expects these risks to be manageable considering Elis’ integration track record and its current financial policy.

The ratings are supported by the long-term nature of the contracts and high renewal rates leading to strong revenue visibility, as well as the expectation that the Company will use its surplus cash flow generation towards deleveraging. Furthermore, Elis’s industry-leading position, efficient and large-scale operations, and strong brand name recognition in the flat linen, workwear, hygiene, and well-being service markets also help to support the ratings. The Company benefits from a dense network in its French core market, which supports efficient operations and deliveries to customers. Furthermore, following acquisitions over the past few years, Elis has replicated its French model in other countries such that its revenues from France, its single largest market, account for 31% today, down from 70% in 2014. Elis is also fairly diversified by the type of services it offers and customers it serves, softening the effects of cyclicality or volatility in any particular sector. The Company also benefits from the essentiality of its service, which often represents a relatively small portion of the customer’s cost base, allowing Elis to pass on increased costs. Finally, in recent years, Elis has captured new business through its cleaning, disinfection, and sustainable service offerings. However, the ratings are constrained by the Company’s exposure to markets that have limited organic growth prospects, such as in western Europe, or are more discretionary in nature, such as the hospitality sector; together with the high capital intensity of its business model, these challenges could potentially limit earnings and cash flow growth and therefore deleveraging. Elis’ acquisition strategy does not currently affect the ratings, but if the Company undertook heavily debt-funded acquisitions and/or was less successful in integrating such acquisitions, this could negatively affect the ratings.

In 2022, DBRS Morningstar expects the Company’s financial metrics to remain consistent with a low investment-grade rating (i.e., DBRS Morningstar-adjusted debt-to-EBITDA of less than 3.5 times (x) and DBRS Morningstar-adjusted cash-flow-to-debt of higher than 25%). Elis’ strong business risk profile, expectation of FCF surpluses, and management’s efforts and commitment to manage leverage in a conservative manner all give DBRS Morningstar comfort that these credit metrics are tenable on a sustainable basis. However, if the effect of inflationary pressure, in particular on energy cost, and geopolitical turbulences negatively affect Elis’ earnings, cash flows, and leverage metrics, DBRS Morningstar could consider a negative rating action. In addition, a return to more aggressive financial policies or debt funding for large acquisitions could lead to a negative rating action. On the other hand, DBRS Morningstar could take a positive rating action if the Company improves its operating performance and financial metrics (i.e., debt-to-EBITDA of or less than 3.0x and cash-flow-to-debt of higher than 30% on a sustained basis).

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is Rating Companies in the Services Industry (28 January 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (3 February 2021).

The primary sources of information used for this rating include Elis’ audited and interim financial statements, investor presentations, forecasts, budgets and presentations provided by Elis. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/393779.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Giuseppe Fresta, Senior Vice President
Rating Committee Chair: Charles Halam-Andres, Managing Director
Initial Rating Date: 28 March 2019
Last Rating Date: 16 March 2021

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-- Rating Companies in the Services Industry methodology (28 January 2022),
https://www.dbrsmorningstar.com/research/391428/rating-companies-in-the-services-industry.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021),
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.