Graanul - Talking up a refinancing
Dear All,
Please find our updated analysis post the Q3 2024 results on Graanul here.
Graanul is still suffering from transitory issues (inventory de-stocking & non-existent spot market) though it has made progress in its contracted business and premium segment of the market. Q3 2024 was reflected by declining revenues from weakness in the spot market and rising EBITDA (boosted by higher pricing & contracts). The business is being run for cash as capex remains low while net leverage remains elevated at 6.6x. The new development in the situation is that the company is considering acquisitions, and depending on timing, may contribute such targets to a refinancing / liability management process.
Investment Considerations:
- We are on the sidelines on the Graanul Senior Secured Notes at current trading levels in the low 90s. The execution risk associated with growing EBITDA to €120 million at the time of the refinancing needs to be priced into the bonds before we get constructive on the situation.
-If the company can't reach €120 million of EBITDA, there is a high probability that bond holders will rely on shareholder support to support an A&E which is not priced in yet.
-The bond documentation is weak which implies note holders have limited negotiating power in a restructuring.
-LTM EBITDA remains at 65% of its 2022 peak and bond holders will need to wait until Q1 2025 to get more visibility on whether it’s a par refinancing or A&E.
-The mention of potential acquisitions on the Q3 investor call adds another unknown variable which is not priced in the pricing of the Senior Secured Notes.
Talking up a refinancing:
-On the Q3 2024 investor call, management talked about the high quality of the company’s assets and that profitability per ton will end 2024 at the high end of its historical range.
-80% of Graanul’s volumes will be contracted by the beginning of 2025 though wins with customers.
-Working capital outflow in Q3 was due to a large order from a single customer and that is expected to reverse in Q4 2024 leading to cash generation and deleveraging.
-Management also introduced the narrative of acquisitions (bolt-on or large) that could be financed with the support of shareholders and contributed to facilitate a refinancing.
-Lastly, they did mention that they have made all the internal arrangements for having “fireside chats” with investors in Q1 2025.
Recent Results:
-Revenues decreased by 13.2% to €103.7 million (below our expectations at €127 million) with EBITDA at €25.7 million (slightly above our expectations at €24 million) from strength in contracted volumes and higher sales margins.
-Graanul generated €56 of EBITDA per ton (vs. €12 in Q3 2023) due to higher sales margins on contracted volumes, incremental income from one large client, and lower raw material costs which was above our expectations of €25 of EBITDA per ton.
-The company kept its capex low at €1 million vs. €3 million in our Q3 2024 model while reducing capex guidance for 2024 to €7 million from €10 million for FY 2024.
-Unexpected working capital outflow: Q3 2024 saw an unexpected win from a large customer which led to an increase in the receivables balance to €56 million (vs. our projection of €39 million) from €31 million (in Q3 2023) which led to an overall cash burn of €9 million.
-LTM net leverage improved sequentially on a quarter-over-quarter basis to 6.9x from 8.3x due to increase in EBITDA (however that was below our expectations due to cash burn from the working capital outflow).
Modelling in more predictable growth but no M&A:
-We have modelled in ASP of €213 per ton in-line with historically trends with a small recovery in pellet prices going forward as 80% of volumes under contract and we have assumed no recovery in the spot market.
-We have also assumed no growth in costs in transport, electricity, heat and fuel costs despite a declining trend in the previous quarters however we have modelled growth in fixed costs (personnel & operating expenses) in line with inflation of 3%
-We have kept capex at €3 million for Q4 2024 and €5 million per quarter going forward.
-Based on the above, we have projected reported EBITDAR for 2025 at €103 million and reported LTM EBITDAR for Sept. 2026 at €108 million with net leveraging improving to 4.7x by Sept. 2026.
Please note we have not modelled any acquisitions that could change the risk profile of the situation and how it could impact the process around a refinancing of the notes due to lack of information.
Happy to discuss
Saahil
T: +44 203 192 0200
www.sarria.co.uk