Klockner Pentaplast: Tick Tock on the Refinancing
Dear All,
Please find our updated analysis post the Q3 2024 results on Klockner Pentaplast here.
KP delivered a disappointing Q3 2024 earnings report with a reduction in guidance for EBITDA and free cash flow driven by continued pharma de-stocking that continued into Q3 2024. As a result, management has delayed its refinancing to H1 2025 as KPIs need to improve. This creates a near term catalyst as a need for reaching a solution with creditors becomes more urgent as the senior secured portion of the debt stack becomes current in 2025.
Investment Considerations
- Two weeks ago when the company reported its Q3 2024 results, we decided to sell our 2% position in the senior secured notes at 96.5 as we feel the upside is limited given the unknown around refinancing and disappointing Q3 2024 results (explained below)
- Senior Secured Notes: The pharma de-stocking issues & underperformance in the FP segment is creating more uncertainty around a par refinancing process which should be reflected in the price. At the current trading levels, KP is being valued at a 7.9x valuation which is a full valuation multiple given the recent trading performance and uncertainty around a refinancing process. We need to see growth in both the pharma and the food packaging segment to justify a sector average (& higher multiple). In addition, free cash generation needs to improve allowing de-leveraging and a par refinancing.
- Senior Notes: We are on the sidelines here despite the current 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 captures 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. In an alternative scenario, SVP could in partnership with another external investor make a tender offer for the notes at a price which is still below par and crystallise the discount and extract value away from the noteholders.
Disappointing results & with reduced guidance
- The company reported Q3 2024 revenues of EUR 451 million, well below guidance, and adjusted EBITDAR of EUR 69 million, which was right on target.
- Net sales for the Pharma, Health & Protection and Durables (PHD) at EUR 245 million (below Sarria estimates at EUR 291 million) declined by 3% due to lower pricing from raw materials contract terms which were offset by volume gains.
- Food Packaging Q3 revenues were EUR 214 million (below Sarria estimates at EUR 269 million) from a volume decrease in rigid films offset by an improving Flexible and Tray business and pricing lag.
- PHD EBITDA was EUR 50.1 million (slightly below our estimates at EUR 54 million) due to pricing headwinds while Food Packaging EBITDA was EUR 29.6 million (below our estimates of EUR 38 million) from lower volumes and delayed pass-through of higher resin costs.
- Liquidity was 144 million in Q3 with company drawing down 48 million on their RCF to finance “strategic” projects.
- Reducing guidance: On the investor call, management reduced its 2024 EBITDA target to a range of €300 million - 315 million with unlevered free cash flow to €180 million.
Lower projections in our model
- Based on recent trading results, we have assumed a volume growth to be negative in Q4 2024 due to pharma de-stocking & volume decline in the FP segment. For 2025 onwards, we have assumed 2% volume growth in the pharma packaging segment and 1% in the food packaging segment.
- We have also assumed 2% price growth in pharma starting only in H2 2025 and 0% price for the FP segment. We have also assumed -2% commodity price pass-through for the FP segment going forward.
- We have kept capex at €60 million in 2024 as per guidance and €48 million going forward.
- Based on the above, we have projected adjusted EBITDA at €268 million in December 2025 and €282 million in December 2026 (which is below management’s guidance of €300 million) given the lack of visibility on an uptick in the pharma segment.
- Our projections assume a small amount of cash burn mitigated by strong liquidity.
Clock ticking on refinancing process
- The refinancing has been delayed to H1 2025 due to pharma destocking -the management stated on the Q3 2024 call that it was looking at a "full range of strategic alternatives” which could mean anything from a par refinancing to a coercive debt exchange. We note the current trading levels of the debt does not reflect that yet.
- We should note that by March 2025, the RCF, the term loans and the senior secured notes will become current which adds to the urgency of reaching a solution with existing creditors.
- An equity injection by SVP is going to become more crucial the longer the refinancing is delayed. Based on our projections, we believe that number could as high as €400 million to bring leverage to be below 5x.
Happy to discuss
Saahil
T: +44 203 192 0200
www.sarria.co.uk