Frigoglass - Never? Or Now?
All,
Please find our updated analysis here.
So far so good. Advisors are in place, some Romanian operations reduce the risk from Q4, insurance companies have been reasonable (so far) and the Russian borders are still open (so far). Never mind inflation. With the bonds in the 50s and events unfolding, what are the risks and rewards now? What are the scenarios and when we put it all together, do the bonds have a place in our portfolio?
Romanian operations:
- While the main plant is beginning construction, Frigoglass have established limited interim operations in Romania, primarily focused on cabinet assembly.
- Capacity has been reaching some 60k cabinets and is growing. Although management have been hesitant to give precise answers around the size of the operation, we can safely conclude that in the event of Russian borders closing fully, those operations would be wholly insufficient to replace the operations currently located in Russia. The European ICM business would still suffer irreparable damage.
- Seasonality may come to the rescue. The ICM business sees high demand in Q1 and Q2 of any year, with volumes for the latter half falling off significantly. If the west would close borders to Russia only later in the year, Frigoglass would have some more time to react. Either way, however, the new Romanian operations would commence late for the 2023 season.
- Because the opening schedule of the new Romanian plant seems to be slipping into Q223, we assume the company’s profitability will not recover in 2023, even if volumes can be upheld. We, therefore, see H1 2024 as the earliest time the company produces healthy cashflows.
- All this ignores inflation. The fridge cabinets can probably be modified to fit any budget, but are ultimately capital goods in the HORECA segment where the squeeze on disposable income is expected to strike hardest. Also, the consumption of Coca-Cola in Nigeria looks vulnerable to the same effect.
Liquidity:
- ICM are running out of cash now and will require fresh cash to stay afloat. Fresh cash is likely to come from a mix of additional S.S. facilities, the family, insurance proceeds and possibly from Beta Glass.
- Settlement of business interruption claim was indicated for Q2, but we have not heard anything. First payments under that claim had flown already by the time of the last conference call, but we do not know the size of the ultimate settlement if it has already been reached. We don’t suppose the settlement will include the effects of the Russian/Ukrainian war.
- We estimate a need of €60m, which could be partially satisfied with insurance proceeds.
Solutions:
- We have not seen any concrete proposals yet.
- In 2017 the family came to the rescue with an injection of some €30m. There is - hope - the family stands ready again, but those parties who took equity back then, did not get a return on that investment then and we may not get one this time either.
- Despite COMI having been established in the UK and bonds holding all kinds of share pledges throughout the Frigoglass structure, the bonds are not well-positioned. Within the family’s empire, Frigoglass merely represents a cost centre.
- Super Sr. baskets of up to €60m looked still mostly available, although the situation likely requires bondholders to take a haircut or similar, in which case any other agreement may well be found.
- In our view, bonds are best off negotiating further security on assets outside of Frigoglass rather than negotiating for better economics.
Investment Considerations:
- The bonds trade at an apparently low 4.5x a €50m EBITDA, factoring in the fresh cash needed to continue operations. Neither the multiple, nor the EBITDA appear particularly ambitious, but on our projections, future cash flows are not worth the €225m today. Cash conversion is weak (Beta Glass is only 55% owned) and the company will produce positive underlying cashflows at the earliest in 2024 again.
- With 15% premium, we feel like we are asking for a rather old-fashioned yield, but in a market where CCCs routinely yield 12%+ we may even be a touch aggressive. Also, in the event that the west shuts borders with Russia, in particular, if that is over the summer, we are very concerned that 75% of Frigoglass’ ICM operations would come to a grinding halt and the business would lose its customers.
- Ultimately, as opportunists, we are seeing better value elsewhere.
Please reach out to discuss,
Wolfgang