Kem One - Maintaining our view.
All,
Please find our model update for Q1 numbers here.
The only thing that Kem One’s Q1 results confirmed is that there is no sign of a recovery. Operationally, Kem One restarted production in Fos, albeit with a one-month delay. Investors gleaned no insight from management on the pertinent question of sufficient liquidity at Kem One to wait until a recovery in the PVC market, with management refusing to answer any forward-looking questions. We have updated the numbers, but our thesis hasn’t changed. The Company will require additional liquidity if current market conditions persist.
Investment Rationale
- In mid-April, we initiated a 2% short position in Kem One’s Senior Secured bonds at 65%. While we did not act on the opportunity in late March, when the bonds were trading approximately 10 points higher, further reflection led us to conclude there is a significant risk that Kem One may be unable to operate through the next 12 months without seeking additional liquidity.
- We continue to hold this view, and the Q1 results offer no indication that the broader macroeconomic environment is improving. The Company’s refinancing plan assumes an EBITDA of €75 million in FY25, rising to €133 million and €196 million in FY26 and FY27, respectively. However, given current market dynamics, we believe these projections are overly optimistic. We anticipate downward revisions to FY25 guidance, as well as delays in the anticipated recovery.
- The Company projects the typical hockey stick upward trending EBITDA, improving further in FY26 & FY27. This is despite a well-flagged increase in electricity prices for Kem One, following the end of the ARENH (Regulated Access to Historic Nuclear Electricity) legislation in December 2025.
Trade Timing:
- We initiated this trade in April, intending to exit the short post-Q1 results. However, nothing we heard on the Q1 call changes our view that Kem One is likely to run out of liquidity if current market conditions persist. We will maintain our short until Q2 results, likely in early August.
- The bonds could feasibly trade down to sub-50 without any recovery in the PVC market. This scenario would result in further restructuring, which should lead to a substantial debt-for-equity swap.
- The bonds are unlikely to trade up beyond 70 without the Company using its liquidity to repurchase the bonds. Given the uncertainty in the market, we view this as unlikely.
- It should be noted that the trade is broadly binary, hence, the size of our position is only 2%.
Q1 results:
- Management was reluctant to provide any forward-looking guidance, meaning the results call was practically a non-event. The relevance of the Q1 figures is limited, with EBITDA for the quarter just €4 million,
- The results were not able to dispel the view that there is no sign of life in the European PVC markets. Kem One is experiencing lower volumes than last year, and demand in Europe and the export market remains soft.
- Operationally, Kem One restarted production in Fos, albeit with a one-month delay. No point quoting leverage, with EBITDA for the quarter at €4m and LTM €9m.
- Cash is €51m plus €80m availability from the new facility. If volumes and pricing remain at current levels, Kem One will quickly use its existing liquidity.
Happy to discuss.
Tomás
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk