Pfleiderer - The Dust Settles
Dear All,
Please find our updated analysis post the Q2 2024 results and A&E process 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. Armed with a new business plan and fresh capital from SVP, Pfleiderer is poised to become a more cash generative business which is leveraged to recovery in the DACH construction and residential real estate market.
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 13% - 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 6.3x 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 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 4x.
Glimmer of light in the distance
-As detailed in its Q2 204 results, management is seeing an easing of pricing pressure in its premium product segments with flat volumes. Pricing remains subdued in the lower priced product segments. Management expects a recovery to be more broad-based and gradual starting in 2025.
-Focused on variables it can control: In the H2 2024, management is focused on completing its €29 million cost cutting target which is focused on the following areas: material efficiency, headcount optimisation, insurance and transportation costs.
Recent Results
-Topline still reflecting weakness: Q2 2024 sales were €216 million and below our estimate of €241 million. Weakness was driven by lower pricing and flat volumes. Volumes in the Silekol segment increased by 16% and offset by price declines.
-Q2 2024 Adjusted EBITDA of €21 million with margins at 9.9% vs Sarria estimates of €25 million but 12% higher than Q1 2024 from improving volumes and cost measures.
-Capex remains at €9 million for Q2 2024 which was below our estimates of €14 million. We expect capex to rise in the coming two quarters to €35 million per quarter to finance the acquisition of a port facility for the Silekol division (Project Nord) which is being financed via the equity injection from SVP.
-Cashflow from operations was -€1 million due to working capital outflow of €13 million. Liquidity remains healthy at €82 million as only €5 million of the €65 million RCF is drawn.
- Net leverage remains elevated to 8.7x (on a reported EBITDAR basis) but 5.0x (on an adjusted EBITDA basis).
Slow and steady improvement vs the proverbial hockey stock
-Management expects revenues of €1.28 billion and €195 million in EBITDA in the medium term with free cash flow at €140 million in the business plan released during the A&E process. They expect recovery of both price and volumes to start in 2025.
- However, Sarria's projections assumes the transmission process from rate cuts to pick up in the demand for real estate and renovation activity to be more gradual (given the near term murky macro picture) and only accelerate in Q1 2026. Hence our rationale for revenues of €1.1 billion and €156 million in reported EBITDA by 2027 which implies net leverage of 4.5x which could make a par refinancing feasible only in 2028.
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