KME – comments on the Q2 20 results call

All,

While the Q2 20 numbers reflect the continued resiliency of the company into the Q4 19 and Q1 20 pre coronavirus slowdown, the full impact of the coronavirus will only be seen in the Q3 20 numbers. With a major change in format – written questions via webcast instead of open Q&A – the KME Q2 20 results call was less hostile than most of the past result calls.

 The group is seeing minimal impact on the speciality division, but significant impact in the main copper division, although with the 3 months lag that we previously flagged. Therefore, the weakness of Q2 20 has fallen mainly on the Q3 numbers, where management sees a 10% to 16-17% impact on order intake, depending on the segment, which was a bit weaker than management’s previous expectations. However, management is also seeing a strong recovery of new orders and new volumes after the lagged impact of Q2 into Q3. 

The extension and merger of the KME and the old MKM facilities are progressing well, with lower overall costs expected as the old MKM was a weaker credit than the combined KME group. Management still sees the disposal of the Trefimetaux business happening in the next few months, as it is currently in discussions with an interested party. The real estate securing the bonds has been reappraised with a EUR12m increase in value from the time of the bond issue, and there is potential further upside from the appraisal of the machinery of the plant, according to management. The significant reduction of the Capex outflows is in line with the plan and should be considered permanent, as the investment needs for the US business is behind the company. Finally, the company will pursue bond buybacks on an opportunistic basis, balancing the potential deleveraging of the discounted buybacks with the need to keep a good liquidity cushion for the business.

The early indication for EBITDA, as provided by management, suggests a meaningful impact. However, if the business recovers most of its weakness after that, the combination of decent liquidity cushion and reduced Capex needs could support a return to positive FCF into 2021. The bonds have weakened over the past week, partly reflecting the more difficult conditions in the HY market. We will revise our financial projections and position on the bonds shortly.

 Please feel free to reach out if you would like to exchange ideas on the name.

Juliano

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