Frigoglass - from the frying pan
All,
Please find our only slightly amended analysis of Frigoglass here. We have merely re-phased the insurance payments and CapEx this year.
We had been looking relatively favourably upon the insurance protection since the first €15m had been paid out so timely. The news on Thursday, however, that the company has settled its property damage claim for €42m was still a positive surprise. We had been of the belief that the property damage portion of the €89m package was smaller. The settlement leaves Frigoglass with fewer risks going forward. But those are still big risks.
Risk 1:Liquidity:
- Frigoglass have settled their property damages claim for €42m. Specifically, the company draws due attention to having received €10m immediately upon settlement, while the remaining €17m outstanding will be subject to proof of expenditures.
- Looking at the two sheds that burned down in Romania and thinking about the likely level of automation in these facilities, we think that €42m should be ample cover.
- Seasonal as Frigoglass’ business is, its liquidity low-point is in Q1, i.e. right now. I.e. the insurance company will have noted that if they don’t send the cash quickly, the business interruption claim could quickly become much worse.
- Unless we receive a fresh cash request soon from Frigoglass, there won’t be one. The company won’t be needing fresh cash from Q2 onwards.
- To the extent Frigoglass need additional liquidity - as our model suggests - it should be well within the baskets its documentation affords.
Risk 2: Loss of a customer:
- The largest customers by far of Frigoglass Romania are CCH themselves and other Coca-Cola entities. We consider the company’s lion share of customers therefore as relatively safe.
- However, brewers such as Heineken could pull out if the company does not deliver as required. It is important to note in this context the relative protection of a closely-knit maintenance network throughout Eastern Europe, which should lend some protection from raising switching costs among customers. Still, third-party brands could desert Frigoglass in favour of other suppliers.
- The company is insured against business interruption, but we think that cannot make up for permanent loss of a customer.
- We note that Frigoglass financials and apparently volumes have held up almost magically in Q321. If that is to continue, then we see no increased risk of a customer leaving. As we’ve written before however, we wonder how Frigoglass have come through Q321 so apparently unscathed.
Risk 3: Geopolitics:
- Frigoglass have of course moved operations from quite literally a frying pan to - Russia, just behind the Ukrainian border. In case of an invasion of Ukraine by Russia, we are not sure how deliveries from Russia will cross the border. The Russian plant was Frigoglass's second-biggest facility before taking up most of the Romanian volume and should now be by far its largest.
- We struggle to argue that Frigoglass would be able to substantially continue its ICM business if Russia invades Ukraine.
- We are so far not overwhelmed with the diplomatic progress in the matter. Perhaps if Germany would send other 5k helmets, that would settle the scores?
Investment Considerations:
- We are still not taking a position in Frigoglass.
- We note that one risk - liquidity risk - is significantly reduced. However, in particular, the geopolitical risk still prevents us from taking a position in the SSNs.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003