Adler Pelzer - Far Out
All,
Please find our updated analysis of Adler Pelzer here.
Clearly, the market is a lot more bullish on European automotive than we are. At least, neither the non-cash earnings lifting APG's EBITDA, nor the continued weak cashflow profile, never mind the dividends on top of the previously flagged up-stream loan could stop the short covering following the earnings release. While Asian revenues have been strong YoY, those have also been flagged and we don’t see them strong enough to offset the impending loss of volume in Europe next year.
Investment Rationale:
- We have taken a 5% short position in the bonds at 90c/€ as the first of a two short legs in the name. Bonds have risen 5 points on the release of Q3 figures, but we assume they will give that up again before Christmas, when we are looking to exit the first leg again due to the bonds' high coupon. We are looking to re-set the short some time in Q1 when we assume German production volumes to fall.
- Having modelled a somewhat far out recap scenario below, we do not think of it as any short-term prospect, but rather a background for thoughts going into in Q325 when the RCF becomes current. FAs to parade in Q125 to give themselves time to organise restructuring opinions etc.
- We struggle to model enough of a turnaround to eventually refinance these bonds. and are concerned about the location and availability of most of the cash.
Forecast 2025:
- We do not foresee APG covering its senior debt interest bill next year. We struggle to model a strong enough turnaround while the European market is struggling overall.
- We see European OEMs give up some volume (market share to Chinese OEMs) next year to protect profitability with old ICE models. Perhaps the exit of Stellantis’ CEO suggests they will take a longer-term outlook, but we are likely only discussing degrees of pain.
- German YoY production is running at +17%, tendency rising. We can find no fundamental reason for this other than that the OEMs are front-loading 2025 exports to the US to beat the tariff barrier - when / if it comes. We therefore anticipate a sharp drop in volumes in H125 in Europe’s core market and expect to see this in the data before the company reports.
Structural considerations:
- We do not believe that the cash on balance sheet is actually freely available throughout the group. If so, we wonder why the Scudieris had to give up 45% of their empire to the Hayashis instead of just paying down the debt with cash on BS. Likewise, we also wonder why the RCF needed drawing in 2023 while a €2.3bn revenue T1 supplier sits on over €200m of cash. It’s a theme that JV companies (particular in China) are accumulating vast amounts of cash that can’t be repatriated without diluting ownership. It often remains in the JV, backing increasingly long payables to the local supplier and we wonder if that is the case here.
- The German reporting group is held by an Italian organisation. If APG can’t be refinanced, we are concerned the company would be dragged into the Italian system, where our restructuring experience has been even less favourable. In a Concordato Preventivo, the family would suggest the plan and fresh cash could be injected super sr., squeezing the holdco-level bonds in the middle. We realise this scenario is still far out, but if German management wants to be prepared for all eventualities, they might need to find an advisor as soon as Q225.
Here to discuss with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk