Morningstar DBRS Upgrades Elis’ Credit Ratings to BBB; Changes Trend to Stable

DBRS Ratings GmbH (Morningstar DBRS) upgraded Elis S.A.’s (Elis or the Company) Issuer Rating and Senior Unsecured Notes rating each to BBB from BBB (low) and changed the trends on the ratings to Stable from Positive. The upgrades reflect prolonged improvements in Elis' operating performance that, along with a sound financial policy, led to improved financial metrics that are currently commensurate with a BBB rating.

Morningstar DBRS anticipates the company to continue to maintain a leverage ratio (gross debt-to-EBITDA) between 2.0x and 2.5x over the next one to four years, which is reflected in the Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings are supported by the company’s stable and high operating margin, along with improved revenue visibility for the business, thanks to medium-term contracts and customer stickiness. In addition, Elis' diversification in terms of end-market customers, helps it to withstand the effects of cyclicality in any particular sector, as seen in the hospitality sector during the coronavirus pandemic.

On the other hand, the credit ratings are constrained by the concentration in a few geographic areas, such as France, the UK & Ireland, and Central European countries, which together accounted for more than two-third of 2023 revenue. In addition, Elis has limited opportunities to rapidly expand and increase its market shares in key geographies, as the sector that it operates in is highly fragmented and market competition regulations might prevent the acquisitions of larger competitors.

CREDIT RATING DRIVERS
Positive Credit Rating Drivers:

Morningstar DBRS does not expect to take a positive credit rating action in the near term. However, Morningstar DBRS may consider an upgrade if, in combination with a strengthening in Elis’ business risk profile in areas such as Market Position and Diversification, the Company manages to keep the gross leverage ratio consistently below 2.00x.

Negative Credit Rating Drivers:

Morningstar DBRS may consider a negative credit rating action if Elis’ operating performance weakens, leading to deteriorated financial metrics, such as the gross leverage consistently faring above 3.00x and/or Operating Cash Flow-to-gross debt dropping below 25%. In addition, a more aggressive financial policy and/or large debt funded acquisitions could also lead to a negative rating action.

EARNINGS OUTLOOK
Elis' F2023 performance benefitted from +11.8% organic revenue growth, on the back of strong recovery in the hospitality sector in Q1 2023 and sustained price increases throughout the year, equal +9% compared with the previous year. This follows a price effect of +7% in 2022 and it's the result of Elis being able largely pass on input cost inflation with limited impact on its customer churn rate.

Along with some additional price increases expected in 2024, in the range of 2% to 3% to mainly offset wage inflation (accounting for approximately 60% of Elis' total cost base), Morningstar DBRS anticipates the volume effect to be muted over the short term. Morningstar DBRS therefore forecasts revenue growth to reduce to 3% by 2026 from 6% in 2024, reflecting a normalised global inflationary environment and continuous contributions from bolt-on acquisitions, paired with the ramp-up of Elis' newer services, such as Cleanroom and Pest-control.

In terms of EBITDA, Morningstar DBRS anticipates its margin to continue to increase mildly on the back of Elis' ability to offset cost inflation and additional operational efficiencies, leading to the EBITDA margin trending towards and stabilising at 35% over the next years, from 34.3% in F2023.

FINANCIAL OUTLOOK
Elis' leverage decreased to 2.9x in F2023 from 3.1x in F2022, mainly thanks to the Group EBITDA growing more than 17% YoY to EUR 1,477 million. Total debt including leases also increased 7.1% to EUR 4,228 million in F2023. Nevertheless, Morningstar DBRS anticipates net debt to remain stable in F2024.. This, along with increasing EBITDA, is forecast to reduce leverage to 2.4x by F2024, and Operating Cash Flow-to-Debt to exceed 32%. Morningstar DBRS also expects leverage to remain between 2.5x and 2.0x over the next years, as we expect Elis to focus on bolt-on M&A and shareholder returns after having reached its medium-term financial leverage target.

CREDIT RATING RATIONALE
In recent years, Elis has put a strong focus on improving its financial metrics, leading to gross leverage below 3.0x for the first time in the last 10 years. This was due to strong EBITDA growth, which in F2024 increased by 34% since F2019, while gross debt rose only by 7% during the same period. At the same time, Elis demonstrated a prudent financial policy, reflected in a disciplined M&A strategy and the dividend suspension in 2020 and 2021 amidst the pandemic.

In term of Business Risk Assessment, the company has continued to demonstrate its ability to withstand adverse macroeconomic conditions and weakness in some of the industries it serves, such as Hospitality. In particular, its pricing mechanism contracted with its clients allows to pass the majority of its input costs increases, which led to EBITDA margin improving from 32.8% in F2022 to 34.3% in F2023, despite high and sustained inflation. In addition, the Company is targeting some operating efficiencies that Morningstar DBRS believes will contribute to some mild margin improvements over the next years.

However, the Company has limited exposure to emerging markets compared with higher rated peers, leading to limited expected volume growth for the business overall. In addition, despite its strong market position in key geographies, further improvements are unlikely in the short term, reflected in the Stable trend.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the “Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (23 January 2024), https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Elis the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Elis, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Elis, the BRA carries greater weight than the FRA.

Notes:
All figures are in Euro unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Services Industry (20 February 2024), https://dbrs.morningstar.com/research/428396/global-methodology-for-rating-companies-in-the-services-industry.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

The primary sources of information used for this credit rating include Elis’ 2023 audited and interim financial statements, investor presentations, 2023 revenue presentation, forecasts, budgets, presentations, and some information directly provided by the Company to Morningstar DBRS. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

These credit ratings concern newly issued financial instruments. These are the first Morningstar DBRS credit ratings on this financial instrument.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: YES

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

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

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/429304.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Edoardo Danieli, Assistant Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: 28 March 2019
Last Rating Date: 15 March 2023

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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