Intrum Q4 – Up 34% Since November With Plenty More To Go (ITJTY)

Dear readers/followers,

I added to my position in Intrum in 2023 as the share price declined, using a combination of common share buys and cash-secured Puts. I stopped adding during the end of November in 2023 when my position reached the absolute justifiable maximum for any position.

Normally, when a company does a 30%+ in less than 3 months, I’d be singing my own praises from street corners. However, that is not justified in this case, because the fact is that I am mostly in the negative for the total of my position because of my cost basis. I started investing well before we dropped below 80 SEK, which means that I actually went in too early, even if around 38% of my total position has a cost basis of below 70 SEK – which is amazing.

Intrum is a company with some recent headwinds – but the company has taken steps to set the path for its recovery, including eliminating the dividend, asset sales, and cost reductions. In fact, only a few days ago we got 4Q, new news, and new asset sales, so it’s time for an update on this, Europe’s largest credit company.

Because despite a share price that stubbornly due to a 10%+ shorting refuses to rise as of yet, I believe the company on a 2-4 year basis has the potential for more than 200%+ RoR. This remains the heart of my thesis, and I’ll show you why here.

You can find my last article on Intrum here.

Intrum – Perhaps the riskiest in my portfolio, but by far also the most upside.

I’ll be clear. Because of its no-dividend status, Intrum is not an investment for everyone. It’s not an investment for many people at all. There are many safer investments out there than Intrum.

However, there are few investments that, if understood, present the same sort of upside in this market. The company has executed a complex set of strategic actions which have resulted in a cancellation of the dividend and a pathway to profit recovery that’s slated until 2025 or early 2026E at this point.

As I said before. I could in fact, if I wanted, sell over 58% of my position with a profit or no loss at this time. I choose not to do this.

Why?

Intrum is a credit company in a turnaround, and 4Q23 and the end of the year brought exactly what investors expected and more.

The progress on the initiatives by the company is solid. Record ACV signings and superb increases in account values net of churn as well, and the company managed to save 800M on a run-rate basis in terms of SEK. Adjusted income grew by 8% both organically and organically, and Cash EBITDA and EBIT were in line with exceptionally strong 4Q22. This is a positive sign.

Despite M&A’s and dividends, the leverage is at 4.4x and stable, and the company has managed a cash extraction of 5.4B from investing.

There’s also reason to expect increased credit defaults and delinquencies in the near term.

There is a lot to be positive about in 2024E. The significant ACV improvements are set to continue, and the commercial wins in Norway and the UK are improving the company’s market position. The servicing segment continued increasing income with good visibility for more going forward.

On the surface, and looking at share price trends, you might expect Intrum to be in the doldrums of a significant decline.

Let me tell you, once you lift the hood of the monster, you see some incredible trends.

Just as with REITs and any investment, it’s important to see the company’s spread between investment yields and costs. Intrum has managed a historical IRR of around 16% and gross funding costs of about 4-4.5% historically. Funding costs are up to around 5.5% now – but the IRR for unlevered underwriting is now up to 19%, meaning Intrum is outperforming its cost basis or cost of funds. At 4Q, that IRR reached 19%, and even in the quarters prior it was outperforming. Intrum is far more selective with new investments – but the important metrics in the investing segment are collection and performance – and those continue to be high, and above 100% respectively.

It has always been a bad idea to bet against Intrum for the long-term, and the company’s expertise in collection. I view it as an even worse idea here because the underlying performance of the company is beyond solid. In the last 12 months, the company collected over 105B SEK, and as a confirmation of its asset appeal, Intrum recently managed an 11.5B portfolio transaction sale at a BV of 98% as of September 2023. (Source: Intrum 4Q23)

This confirms, to a very high degree, the value of the company’s portfolio and investments, because this is a transaction that includes assets in 13 jurisdictions with over 10,000+ portfolios with a nominal value of almost 400B SEK. Intrum also managed a service mandate of 5 years, servicing fees remain, and it cements Cerberus as a 5 top 5 clients. Cerberus also pays proceeds of 8.2B SEK, which will be used to reduce net debt to close to below 50B.

This leaves the company with a proforma LTM EBITDA of 11B SEK, which means that the company’s current valuation is now less than 1x EBITDA – more on that later in the valuation section.

Overall, Intrum has reached most of its laid-out 2023 goals and has progressed even further along some goals than one might have expected. Improvements in servicing have gone a long way, and the cost-savings targets are not only achieved but expanded upon.

Intrum has exited high-risk markets and reduced its overall target scope geographically while strengthening its position in the UK and Spain, two strong markets. Asset sales are likely to continue as well, and I expect it will leave the company with somewhere just below or around the 10B SEK proforma LTM EBITDA, which with the company’s reduced risk profile and capital-light business model – which is the way I have been wanting to see Intrum go for a long time.

This lays the groundwork for the company’s future improvements and its progress back to below 4x in net debt. The fact that it won’t be paying a dividend in 2024, and likely not in 2025 either means that billions will go toward debt repayment. On a proforma basis on the basis of net debt, an 11B LTM EBITDA implies a proforma net debt of 3.7x post-transaction, but we’ll get a better idea of where things are in the next few quarters – I expect them to be going down at the very least. In 2023 the company managed a reduction of 0.3x – and that was with significant dividend payments.

I therefore expect Intrum to manage to reach its stated 3.5x target by either 2025E during that year, or at the beginning of 2026E. I also expect the share price to climb long before that happens.

It’s important to realize that all of these positives and results come during a time when margins were still somewhat subdued. There are significant improvements expected for adjusted incomes and margins by Year-end 2024.

4Q23 was in fact the best quarter in Intrum’s history in terms of new Account signings.

Here are the goals.

My reaction is: “Bring it on”. I have a high conviction that Intrum can manage this.

Intrum’s valuation

Risks to this investment are well-established in previous articles. If you’re a sort of conservative DGR investor, I would say that the likelihood that this investment is for you is relatively low. For those of you willing to sit on your investment for 1-2 years, I believe this may become interesting.

At below 70 SEK per share, which the company is as I am writing this article, the company is being valued at less than 1x to any sort of realistic EBITDA. The P/E’s are down below 5x. And remember – every SEK that’s being generated is going to be directed at bringing down the liability side of the company’s balance sheet for the next two years.

Once this is done, the company is moving back to dividends and growth.

Because of that, even with the impact of asset sales that will dial down the company’s future return rates, I still rate this company as one with a price target of at least 200-250 SEK, which brings the upside over 200%, as with my last article.

I also want to point out that it’s far from the first time Intrum has done this, and actually, it was worse during COVID-19.

Just as I said before, a materialization of my expected return won’t turn me rich – I’ve already considered this. But this position is so large that it will certainly represent years’ worth of investment returns otherwise – just as a bankruptcy or downturn would require me to work for at least a year to make up for the loss.

By that logic, it’s a high-risk investment.

The company remains incredibly short. Over 11% here. But I do not believe Shorts have a case against this company any longer. The dividend is already cut. Intrum’s trajectory from here on onward is going only in one direction – up. That is my conviction based on results and forecasts.

The bearish case seems to be, from what I can make out from bearish analysts that remain, some sort of drop in the collections or investment performance. With the company selling off riskier assets and overall de-risking the portfolio, this is still a possibility, but I would say it’s far more remote than it was a year ago and more when the stock was still trading over 150 SEK. There’s also the bearish assumption about a return to dividends. The stock took a drop when it became clear that the dividend resumption might have to be postponed until early 2026 due to the EBITDA impact of selling portfolio assets. The assumption that Intrum might not be able to pay as generous a dividend as it once had, one that has some merit – though not where I believe it is the valid core of a bearish case.

The short interest seems to, as I interpret it, to be drawn from a justifiable weakness in the company’s early 2023 P&L which became clearer and clearer during the year. Intrum overleveraged during ZIRP and took on far more risk than it should have in the interest of excessive growth, believing themselves to be able to manage the shortfalls, only to find that when interest rates turn, some of their clients were quick to get out of the riskier/more toxic assets where they had a stake. In the beginning, I did not disagree with the short case and that the company could not be argued to, at that very state, be worth over 200 SEK/share. Now I do not believe, even if the market still seems to do so, that there is much left in the way of downward potential. All the bullish case “needs” is for the company to continue to do exactly what it has been doing in recovering, monetizing, and improving. The fact that it’s doing so is proven in these 4Q23 results, above all with a 3% increase in underwriting IRR without a corresponding increase in funding costs.

S&P global targets here have been up since my last article. 4 analysts give the company a range of 77 SEK on the low side and 99 SEK on the high side, with 2 at a “BUY” and 2 at a “HOLD”. It remains undercovered by official analysts, and I argue it remains a misunderstood stock. (Source: S&P Global/TIKR.com)

The upside at recovery here can be as high as 200-300% if it materializes, and I am willing to wait here. I believe that Intrum is at least, following its debt reductions to 3.5x which I see as almost guaranteed because of the no-dividend, worth 3-4x EBITDA and at least 7-10x P/E as would be the average in the financial and credit sector in Europe, with peers such as insurances and banks.

On this basis, there’s a massive upside here.

The only downside that I see with Intrum is the risk of material deterioration if the company’s turnaround fails. But I fail to see this as a likely possibility because this would entail a collapse of the credit markets. Intrum is the largest credit servicing and collections agency in all of Europe. This leadership position is absolutely undisputed. The operations are of course not without challenges and problems, as we’ve seen, and Intrum certainly took things too during ZIRP, but is now correcting this.

My long-term thesis is as follows for 2024E.

Thesis

• Intrum is a market-leading debt collection and credit company. In Europe and LATAM, it’s one of the more significant ones. The company is currently trading down due to a mix of headwinds, primarily from assets it got as part of an M&A.
• I view these issues as temporary, even if that “temporary” could turn into 1-2 years before normalization, given the pressures on the company to de-lever, and do so quickly.
• I rate Intrum a “BUY” here, at any time the native share price is below 140 SEK. My long-term expectation is for the company to go above 200-240 SEK again.
• This thesis is updated as of 2024E.

Remember, I’m all about:

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

Despite the cancellation of the dividend, I am unfazed. This company remains a “BUY”.

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.

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.