Klockner Pentaplast - sailing into a refinancing
Dear All,
Please see our updated analysis and model post the Q2 2024 results on Klockner Pentaplast here.
KP delivered a mixed Q2 2024 earnings report with good performance in the PHD segment which compensated for weakness in the FP segment (driven by higher rPET prices). However, management was able to deliver on variables it could control (costs, capex, adjustments and working capital) and guided to the top end of its EBITDA target. In addition, based on the existing trends in order rates and the expected decline in rPET prices in H2 2024, we expect a supportive fundamental backdrop for a refinancing of the company's existing debt.
Investment Rationale:
- We remain holders of the senior secured notes at 2% of NAV as we await a KP to launch a refinancing by the end of the year.
- The bonds have another 5pts pull to par, and our base case scenario is refinancing in the coming 6 months. The downside centres on the underperformance of guidance, which given their visibility on orders, we see as unlikely. SVP will seek to refinance the whole structure in 2025. It is rumoured that SVP has a blocking stake in the Senior (sub) Notes.
Mixed Q2 2024 results offset by better-than-expected guidance for H2 2024:
- Consolidated revenues at €477.8 million declined by 4% due to unfavourable mix and flat sales volumes which was below our estimate of €507 million.
- Gross profit was €83.5 million (which was below our expectations of €87 million) increased by 6% which was driven by decreased material and energy costs which was partially offset by an unfavourable mix and flat sales volumes. Excluding the FX impact, gross profit increased by 5%.
-Quality of earnings was better than the market (and our expectations) with adjustments coming in at €9 million.
- The positive was in the PHD segment where volumes increased by 4% driven by Labels and Industrial, but offset by lower Pharma volume to leave revenues flat YoY at €259.3 million. Revenues were close to our expectations. EBITDA increased by 15% to €53.7 million due to volume leverage and material productivity. EBITDA margins improved by 300 bps to 21% which beat expectations.
-The disappointment was in the food packaging segment where volumes decreased by 4% and revenues at €218.5 million decreased by 8% due to volume decreases in rigid films and pass-through raw material price declines mitigating improving volumes in trays. Adjusted EBITDA at €24.5 million decreased by 21% due to lower volumes and delayed pass-through in higher resin costs. Both revenues and EBITDA were below our projections however we would like to point out that the FP segment is more volatile and our constructive thesis on the senior secured notes is based on the performance of the PHD segment.
- Management guided to adjusted EBITDA of more than €325 million with improving order rates in H2 2024.
- They also reiterated a regular par refinancing in H2 2024.
Tale of two halves in 2024 - raising estimates:
- As per the Q2 call and guidance on increasing order rates, we are accelerating our top-line revenue growth for the PHD segment at 15% for Q3 and 25% for Q4 on better comparables and accelerating demand.
- We have also assumed 15% revenue growth in Q3 and Q4 for the FP segment as well for the same reasons.
- Management has done a great job around cost controls and we have assumed the trend to continue with PHD EBITDA margins to improve to 19% and 14% for the FP segment in 2024.
- We have increased our Adjusted EBITDA expectation for 2024 by €20 million to €268 million and €300 million for 2025 which is lower than management guidance however we expect SVP to step in if needed with equity as they have in the past.
Therefore we think the right combination of accelerating growth in H2 2024, cost cuts & capex containment going into 2025 combined with a positive new issue market (driven by rate cuts) is a good set-up for the refinancing.
Happy to discuss.
Saahil
T: +44 203 192 0200
www.sarria.co.uk