Pfleiderer - The sun will shine again
All,
Please find our Pfleiderer initiation here.
While we think Pfleiderer is a quality business - it is in the wrong place at the wrong time with debt maturities in 2025 and 2026. The company has a quality management team and has shown cost discipline. Even with EBITDA expected to reach trough levels in 2024, we expect the company to generate free cash flow (driven by cuts to operating expenses and capex as well as low working capital) which will allow it to survive 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 Considerations:
We are convinced of the medium-term value in the company and therefore of the bonds. In the short term we will be weighing up when it makes sense to buy ourselves into the structure, as we think news flow will turn worse before it turns better. With the maturity wall in 2026 and sufficient cash flow, we are not concerned about any immediate events other than deteriorating financial performance. Recovery depends chiefly on the rebound of the German residential real estate refurbishment market, which we see as a derivative of the RE market overall. So for the moment we feel no rush to head into the bonds, but will sit down when re-united as a team again next week to discuss strategy.
Current Trading (Q3 2023):
The market environment for Pfleiderer products has slowed due to high core inflation, elevated interest rates, weak consumer confidence and changes in spending behaviour. Building permits declined by 30% and industry utilisation declined below 80%.
Pfleiderer's project business grew but demand decreased in its other sales channels due to the factors outlined above. Both the EWP and Silekol divisions experienced a decline in sales volumes. The EWP division continued its pricing strategy by passing less of the decline in raw material pricing to customers. The Silekol division experienced a decline in pricing as well in the quarter.
The company generated €4.2 million in cost savings during the quarter and has a comprehensive set of short-term mitigation actions and mid-term valuation creation plans which is expected to deliver €25 million in additional EBITDA over the next 24 months.
31% decline in Q3 2023 revenues to €209.7 million driven by lower sales volumes, pass through lower raw material cost and lower electricity sales.
18% decline in Q3 2023 Adjusted EBITDA to €31.6 million driven by Silekol whereas EWP was able to slightly increase its EBITDA. Q3 2023 EBITDA margin improved to 15.1% which was driven by cost
cutting, positive pass-through and electricity trading result.
Adjusted free cash flow was €13.4 million (decline vs. €24.7 million in Q3 2022) which was driven by lower results and net working capital increase. Net leverage was slightly higher at 5.0x driven by lower LTM EBITDA.
Housekeeping
The next catalyst for this name will be the reporting of the FY 2023 financial results which may prompt a reaction to the trading levels of the bonds and our views.
Given the downturn in the sector and credit, we expect Pfleiderer to show similar trends in its KPIs (decline in sales and margins but cuts in capex and resilient liquidity) in its Q4 2023 results.
Saahil
T: +44 203 192 0200
www.sarria.co.uk