Frigoglass - Does it make sense?

All,

Please find our updated analysis of Frigoglass here.

Now that the company is finally restructuring, the opportunity is no longer what we believed it to be earlier in the year. Even though the deal that the Ad-Hoc group has achieved is better than we had anticipated - a clean-cut 100% of equity, the situation around the rebuild of the Romanian plant has not improved by enough to avoid what appears to be a very bleak outlook for H1 2023. In an industry with as little differentiation as low-volume fridges, we are concerned that once such business is lost, it is hard to gain it back.

Investment Considerations: 

- We have decided not to take a position in Frigoglass after all. The forecast published last week seems conservative. But even so, we struggle to make the numbers work for us. 

- In the simplest terms, the business is likely to burn cash next year (not even considering the Romanian rebuild). It will then have to go about passing on inflation and rebuilding sales. The latter should increasingly come from servicing - particularly in an inflationary environment, so that should be good. However, we are struggling to model significant cash generation over the coming years, which is also reflected in the low cash coupon on the stub notes.

- In the long-term then Frigoglass - an undifferentiated manufacturing business should earn perhaps a 12.5% EBITDA margin. So on a proportionate basis, bondholders (future shareholders) could perhaps expect EBITDA of €45m, which when valued at 5.5x would double their investment today (excl. fresh cash) - but that’s in 2026 and it ignores a great many things.

- The above calculation equates to a 20% IRR, not bad for what started out as debt. But Nigerian government bonds yield 10% and overall the business is mostly exposed to EM. Never mind that Frigoglass only own 55% of Beta Glass. So when adjusting for the EM exposure and the low cash coupon, the potential long-term return on investment approaches a territory nowadays filled with much more benign names that are far more predictable and promise to pay cash along the way.

Beta Glass:

- The business is economically 55% owned with much of the remainder still controlled by the family. We understand the local support network, such as logistics also to be largely the business of the family. So we are not entirely sure for what valuation we would be able to sell that majority holding. 

- Beta Glass operations appear to be well run and the company has a reason to exist in white and green bottles - competing with Sun Glass.

- We are concerned about the company’s exposure to energy prices, however. Through energy supply, licenses etc, the Nigerian government effectively holds the key to Beta Glass’ competitiveness and we are not sure we are well enough connected.

Romanian Plant:

- Dates of completion oscillate between Q1 and Q2 of next year. The later would be very late in our opinion, as we are factoring in a ramp-up phase as well. We are therefore concerned that exposure to Russian sanctions will bite harder than what we anticipated six months ago. 

- Completion of the plant and the return of operations from Russia should free up significant WC, which is factored into the plans.

- A further escalation between Russia and the west could effectively shut the border and stifle Frigoglass’ ability to deliver any significant product at all for several months. 

Happy to discuss,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk