Pfleiderer - hanging in there - Positioning
Dear All,
Please find our updated analysis post the Q3 2024 results on Pfleiderer here.
We remain constructive on the Pfleiderer situation and the amended high yield bonds. Hence we intend to keep our current exposure in the amended senior secured notes / FRN at 5% of NAV. The dust has now settled on the uncertainty of the debt refinancing.
The German wood panel manufacturer reported Q3 results which still reflected the downturn in the German construction industry with the only positive news that demand has stabilised. Pricing while weak will only recover after volume growth turns positive (currently flat for Pfleiderer in an industry downturn).
Investment Considerations:
-Senior Secured Notes: The current trading price of the bonds give us fourteen points of upside to par, coupon payments and call premiums from a refinancing process in 2028 and an internal rate of return of 14%. These should benefit from yield compression as market participants & rating agencies get comfortable with the trajectory of the recovery and progression with the new business plan KPIs.
-The market value of the notes is creating the valuation of the business at 6.8x which does not assume any improvement in the business.
-We feel that Pfleiderer is a good business with a solid market position however it has been negatively affected by temporary macro headwinds driven by a weak German construction market and elevated interest rates. Our strong conviction on a recovery is driven by the outlook given by the company (trough in 2024; recovery in H2 2025) is driven by a recovering real estate market and falling rates.
-This should lead to a re-rating of the valuation of the overall group and facilitate a refinancing of the bonds crystallising the increased call premium along with giving bond holders par recovery in 2028 as net leverage falls below 4.5x.
Existing liquidity strong & gives Pfleiderer cushion to weather the industry downturn
-In Q3 2024, cash balance remained healthy at EUR 60 million with an undrawn RCF of EUR 59 million with liquidity at EUR 119 million. We expect liquidity remain robust over the next couple of quarters as volumes & pricing recover.
-Cash burn (before debt service) at EUR 11.5 million was below our projections as working capital increase was offset by lower capex.
-We expect Q4 liquidity to improve as working capital is released with the majority of capex (e.g Project Nord) behind it.
Recent Results
- Volumes in its core wood products segment was flat with pricing down (We estimate by 7%). Q3 revenues in the EWP division was EUR 162 million (which was below our estimate at EUR 183 million). EBITDA from the EWP division excluding one-time gain from energy trading was flat at EUR 13.9 million (with core margins improving from 8.1% to 8.6%) in line with our expectations with cost cuts offsetting weakness in price. Please note that EWP EBITDA in 2023 was inflated with benefits from trading electricity / energy.
-The star of the quarter was Silekol which saw quarterly revenues of EUR 57 million (above our estimates at EUR 37 million) driven by market share gains. EBITDA at EUR 6.5 was slightly ahead of our projection of 6 million due to pass-through of raw material pricing and volume growth.
- The company also closed its acquisition of a port terminal facility in Poland (Project Nord) which is expected to be operational in Q3 2025 and financed by the 75 million equity injection from SVP.
- Net leverage at 5.4x (on an LTM pro forma adjusted EBITDA basis) was a slight improvement vs. Q2. Though in a downturn, we think trends in liquidity is a more relevant KPI to focus on.
Modelling a return to growth in H2 2025.
-EWP: we have modelled in flat volume growth for Q1 and Q2 and price declines of 4% & 2% for Q1 and Q2 respectively before growth accelerates in H2.
-Silekol: We have modelled in 2% growth in volume and 2% growth in pricing
-Gross margin: We have assumed margins gradually improve from 12% in Q4 2024 to 17% in Q4 2025 as we have high conviction that management will show discipline on costs
-We have kept capex at EUR 15 million per quarter.
-We have assumed no contribution from Project Nord yet (despite management stating EUR 18 million profit contribution after Q3 2025).
-Based on the above, we have projected adjusted EBITDAR for 2025 at EUR 94 million, adjusted EBITDAR for 2026 at EUR 119 million and adjusted EBITDAR for 2027 at EUR 145 million with net leveraging improving to 5.0x by Dec. 2027.
The quarter demonstrated the company managing well through an industry downturn which is only expected to improve in 2025.
We look forward to following what could be an interesting (second derivative) real estate cycle recovery play.
Happy to discuss
Saahil
T: +44 203 192 0200
www.sarria.co.uk