Pfleiderer - Survival of the Fittest
All,
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We think Pfleiderer is a good business that has successfully repositioned itself for the premium segment within its industry since 2019. Management will be focused on cost cuts and running the business on a maintenance capex basis to preserve liquidity as it navigates through the downturn. The key to the story is the financial support from the existing shareholder but we think the sun will eventually shine over this company in the first half of 2025.
Investment Consideration
- The current trading price of the bonds give us 17 - 20 points of upside plus coupon over a twelve-month holding period. However, having discussed the situation in our committee, we have come to the conclusion that we would wait for a better entry price as we feel that there are several short-term negative catalysts which may cause some bondholders to sell their positions (which include weak financial results and a potential ratings downgrade).
- We feel that Pfleiderer is a good business with a solid market position however it will be negatively affected by temporary macro headwinds driven by a weak German construction market and elevated interest rates. But we have strong conviction on an eventual recovery due to a housing shortage in Germany and pent-up demand for repair and renovation.
- In the meantime with debt maturities coming up in October 2025 and April 2026, Pfleiderer and its shareholder Strategic Value Partners would need to engage with existing RCF lenders and bondholders by the first half of 2025 which is the most important catalyst for the bonds to trade up.
- We feel that Strategic Value Partners will not walk away from the company and choose to inject equity in the company and offer economic incentives to RCF and bondholders to extend maturities. They have behaved similarly with a previous portfolio company that they own - Klockner Pentaplast. This could be a combination of upfront fees, increase in coupon and perhaps exit fees or synthetic warrants. In addition, if bond process weaken this year, SVP might even be an opportunistic buyer of the bonds as well.
Key areas for further investigation
- We would look to better understand the Gross and EBITDA Margin trajectory as the company reports in the coming quarters and see the impact of the downturn on the company’s financials.
- We would also look to better understand the working capital dynamics especially the long days payables and the usage of the Factoring Line.
Saahil
T: +44 203 192 0200
www.sarria.co.uk