Introduction
Exela Technologies Inc. (NASDAQ:XELA) is a well-known player in the global business process management solutions market which is estimated to be worth over$200bn(TAM). The company’s raison d'etre is to streamline complex and disconnectedprocesses and accelerate the digital transformation of over 4000+ global clients. The company has solid pedigree and credentials in this space and is one of the leading global providers of digital mailroom solutions; it is also one of the largest "non-bank" processors of payments.
The company is also fairly diversified in its end market exposure- banking accounts for 27% of group revenue, healthcare accounts for 23%, insurance accounts for 10%, public sector accounts for 9%, and the rest comes from areas such as manufacturing and tech, legal, etc. XELA predominantly serves American-based clients but as these clients explore global markets, XELA too has made gradual inroads into the EMEA and Asian markets.
Deleveraging progress will weigh heavily on share price movement
Regardless of how you feel about the broad BPM market and how Exela is positioned here, there’s no getting around the fact that this is a highly geared company, quite unlike a lot of its peers. Just to put things into perspective, the company’s debt to total capital stands at175%, the highest within Seeking Alpha’s data processing and outsourcing coverage, which includes 54 other companies! Unsurprisingly, even though XELA has an Enterprise Value of over $1.6bn, only 17% of this comes from XELA’s market-cap of equity shares.
Having a sizeable debt component in your capital structure does not necessarily have to be a bad thing if you can generate ample EBIT to cover your interest expense, but that does not appear to be the case with XELA. Since 2019 the company typically generates quarterly interest expenses to the tune of $40-$50m, but the interest coverage ratio has never quite been able to exceed even 1x.
The weak EBIT dynamics coupled with an elevated debt profile has pushed XELA’sAltman Z scoreinto a worrying zone below 0. For the uninitiated, a score of less than 1.8 points to heightened probability of bankruptcy financial distress.
So, is this a total washout? Not quite, in fact there have been some encouraging developments to reduce the level of gearing and boost the liquidity profile.
Fairly ambivalent about the recently announced buyback program
Separately, also note that the company has recently initiated a buyback program whereby they propose to retire30%of the share count, in exchange for tradable $25 notes (at 6% interest) that are due to expire in 2029. I’m not overly excited about something like this as I would like companies to get their operations in line before venturing towards buybacks (as per YCharts estimates, XELA is still expected to post losses for the next two years).
Also, the notes exchanged will first be traded on an OTC market for a brief period and there’s no guarantee about the liquidity on offer here. There are also question marks over the overall appetite for a program like this; I say this because when they first announced the program on 26th Jan, the price on offer was$1;ostensibly the interest for this program has been below par, and this has prompted them to boost the offer price even further to $1.25 a couple of days back.
XELA has history of resorting to unconventional measures to boost the share price; a year ago they had resorted to a1 for 3reverse stock split program to reduce Nasdaq delisting risks.
Closing thoughts- Is Exela Technologies A Buy, Sell, Or Hold?
Given the significant gearing risks and risks tied to potential delisting, I would recommend XELA only for investors who have the propensity for aggressive risk. The company’s deleveraging plan is progressing well and the operational backdrop also looks more promising after a difficult few quarters. Valuations are cheap and the technical picture looks encouraging as well. XELA is a Buy for investors with aggressive risk appetite.
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