Frigoglass - Not the opportunity we thought it was
All,
Please see our updated model of Frigoglass here.
We had been looking forward to this date, when fresh cash would be injected to help pay for the new Romanian plant and when the ebbing of the ICM season would reduce the company’s heavy dependency on its Russian operation. As it happened however, management on the Q222 call have comprehensively denied that the ICM division would be independent from its Russian operation before the Romanian plant is ramped up. Moreover, we are still lacking detail on the terms of the €30m super sr. facility that has been put in place.
Liquidity and the Super Sr. Facility:
- Liquidity has been tight and getting tighter. Having received substantially all its insurance claims - for damages as well as for business interruption - Frigoglass have been funding losses and the build-up of working capital while the supply chain is under immense stress.
- As such the reconstruction in Romania requires fresh cash, to fund the €62m of CapEx management are flagging for this year. To pay for the Capex Frigoglass will also need Beta Glass to pay a dividend, which could add another €10m to cashflows.
- Following reconstruction and being reasonably constructive on business next year (within context) we see liquidity remaining under pressure throughout 2023, as evidenced by the Ad-Hoc c’ttee’s waiver of coupons for next year. In light of the uncertainties surrounding the business - to say nothing of a sudden closure of Russian borders - we would not be surprised if Frigoglass will need further cash injections along the line.
LUA:
- Details on what has been agreed are scarce and we are concerned that the Super Sr. facility has managed to put itself ahead of the SSNs with respect to the Beta Glass holding. We have no evidence for that, but until we have better detail, we are concerned about this possibility.
- We understand the Super Sr. facility to be limited to the Ad-Hoc C’ttee, which makes the above point yet more important.
Operations:
- Fundamentally, Q222 was a reasonable quarter. Sales were lower than modelled, but must have been achieved at lower prices - particularly in ICM Asia and Africa and so the GM came in on target.
- From there down Frigoglass is relatively transparent and easy to predict. The only outliers being:
- a large receivables balance in Beta Glass, which management stated would revert.
- lower than expected CapEx for the Romanian plant. The company must have been waiting for funding.
- higher usage of local debt lines.
- Note that we are making a further €14m adjustment to management’s Adjusted EBITDA figures.
Investment Considerations:
- We are not taking a position in Frigoglass after all. While the lack of transparency around the Sr. Sec. Facility is forbidding in the first place, the bigger concern is that the company may not be able to reduce its Russian dependence before Q1/Q223. In the context of recent developments in the Russian/Ukrainian conflict we are not inclined to take that risk at this juncture.
- The build-up of inventory ahead of migrating to the Romanian plant also means that 2023 margins should continue to remain under pressure from inflated supply costs.
- The LUA merely postpones an eventual restructuring and it is reasonable to assume that at that time there will be a better entry point.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk