Klockner Pentaplast: packing for a refinancing or debt exchange

Dear All,

Please find our initiation and model on Klockner Pentaplast here as a framework for discussion.

As any market participant in the European high yield market with gray hair would observe, Klockner Pentaplast has been a special situation / “stressed” issuer for the past twelve years. This company has always had a “quality of earnings” problem with “one-time” restructuring costs being used to inflate EBITDA on a regular basis.   

KP is suffering from transitory issues (inventory de-stocking, elevated inflation, demand weakness in its labels & card division) which will dissipate in H2 2024 with volumes expected to sequentially improve. The company continues to invest in high margin production capacity, optimise its FP segment and re-position itself as a predominately high margin pharma packaging business in the medium term however in the near term, it needs to deal with near-term debt maturities which is depressing the valuation of the business.  

               

Investment Rationale  

 While we like the business and the implied valuation of the group through the notes, we will wait till the Q1 2024 results and call before taking a position to get a better understanding of the refinancing process:

- Senior Secured Notes: The above mentioned transitory issues is masking a solid business with good structural tailwinds. Therefore the bonds give us an opportunity to buy into the business at a cheap valuation.  

- Senior Notes: We are on the sidelines here despite the current low cash price. The bonds are a binary bet on a recovery / consensual refinancing process or a hard restructuring. The notes have limited upside with more process risk and hence downside. The notes sit behind nearly €1.8 billion debt which capture most of the valuation. There is also a danger that the notes could be forced into a coercive debt exchange (especially if SVP has a blocking minority in the notes) and elevated to the same level as the SSNs at an exchange ratio which is close to the current trading price which limits your upside while taking on more risk.                


Current Trading 

- The company gave a preliminary Q1 2024 report on the business.  

- Q1 2024 volumes have risen by 7% vs. Q4 2023 fueled by stronger demand in the PHD segments and modest uptick in the Food Packaging segments. Compared to Q1 2023, enterprise volumes were flat.

- Q1 LTM consolidated EBITDA is expected to be €305 - 307 million (up 2% compared to 2023).

- Adjusted EBITDA in Q1 is in the range of €58 - 60 million (+18% sequentially vs. Q4 2023) and down 7% compared to Q1 2023.  

- Cash EBITDA was flat at €50 - 52 million vs. Q1 2023 with liquidity at €157 million to reflect working capital investments and H1 2024 debt interest payments.

- March was affected by €4 million in timing related recycled PET price inflation which the company is addressing in Q2 2024.             

- They also gave a preliminary outlook for 2024 which was

  • Consolidated adjusted EBITDA of €310 - 325 million 

  • Cash EBITDA of €250 - 260 million

  • Growth & Productivity Capex of €35 million / Maintenance Capex of €40 million

  • Unlevered Free Cash Flow of €185 - 200 million with liquidity of €300 million

  • Improving quality of earnings (Cash EBITDA / Adjusted EBITDA) from 67% in 2023 to 80% in 2024

Housekeeping

 The next catalyst on this name will be the full reporting of the Q1 2024 financial results which may prompt a reaction to the trading levels of the bonds and our views. The proverbial elephant in the room that investors would like clarity on are the company’s plans for refinancing its existing debt structure. In addition, given the positive outlook from management on their initial statement on the Q1 2024 results, we expect to see progress around cost cuts, diminishing inventory de-stocking, improvements in volumes and demand for H2 2024.

Happy to discuss.

Saahil 

E: sdey@sarria.co.uk

T: +44 203 192 0200
www.sarria.co.uk

Saahil DeyKLOCKNER