Klöckner - How well can you sell? - Positioning
All,
Please find an updated analysis of Klöckner Pentaplast here.
Klöckner | Live Discussion, Tuesday, 28th Jan, 3 pm UK time | 10 am EST, please register here.
Sometimes your model surprises you. Perhaps that’s what modelling is for, but in the case of Klöckner Pentaplast, our recap scenario certainly surprises us with a very expensive bill for SVP. With only one, perhaps two sets of results to go before the company must propose a plan, this name will be all about how well management can sell its so heavily advertised Pro-Forma Adjustments to creditors. We are expecting a lot of detail to come forward in an effort to persuade Sr. Sec. creditors to roll with as little pay-down as possible. On balance, we see the SSN’s glass as half full, but we are less bullish about the SUNs'.
Investment Considerations:
- We have traded the name well so far and are dipping our toes back for 2% of NAV in the SSNs at 90c/€. We think the sponsor should try to hold on to the company and that would require keeping the SSNs whole, giving us 10 points (in cash most likely) and a coupon. There is a risk that SVP decide to walk away or be aggressive. In that case we think the SSNs are covered at 80c/€, but should overshoot on the downside with additional fresh cash required from those who want to own it. We will add to the position if it trades down further.
De-Stocking:
- The forthcoming deal hinges primarily on the idea that the pharma business has been a victim of temporary de-stocking in H223 and that order volumes will return - now. KP are holding out with a proposal in the hope of having something positive to report in the Q425 or Q125 results before approaching creditors.
- The narrative is supported by the Pharma division’s uncharacteristic drop in volumes in 2023.
- However, competitors in the pharma packaging business are trading reasonably well and we don’t yet know why KP should have been hit so disproportionately.
Valuation:
- Our DCF produces a significantly lower EV than trading comps suggest. Again, one large difference stems from the strong EBITDA margins seen at the trading comps we can identify.
- Another reason is that we have not given the company full credit for its Pro Forma adjustments the way some other market participants might do. We are allowing for some improvement of approx €35m (€15m in pharma revenue and €20m in SG&A cost reductions) and are allowing for some RPET pass through in the food packaging business.
- However, we also continue to build some inflation into our projections and are bringing one-off costs down to half their current level.
- Ultimately, the refinancing will in large part be decided by how well KP can sell its Pro Forma Adjustments.
Debt Carrying Capacity:
- We have the company able to carry only €1.4bn of debt (already using lower one-offs than current run-rate) at 8% in this environment, which conveniently also equates to 5x IAS 17 Adjusted (but not Pro Forma) EBITDA.
- Using the above in a recap table requires a 20% haircut on the SSNs, which SVP would have to address with some €450m of cash injection (leaving €100m in the company), if the sponsor wishes to remain in control.
- Crucial for SVP will unsurprisingly be how much of the Pro Forma Adjustments creditors are willing to account for and how little of the One-Offs they are willing to subtract.
- If the sponsor decides not to chase the deal, then the SSNs should be covered through the equity, but those wishing to get a theoretical par recovery will have to inject fresh cash - in part to put on the balance sheet and in part to allow for a smaller new credit facility to refinance them.
Trump Tariffs:
- We don’t think this will be a major topic. We don’t know the precise product flows between plants and end markets by geography, but KP has seven plants in the US, which is approximately the equivalent share of what the region accounts for in revenues.
I look forward to discussing this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk