Pfleiderer - Light through the clouds - Positioning
Dear All,
Please find our updated model and positioning on Pfleiderer, here.
After listening to the Q4 2023 & Q1 2024 earnings call, we were pleasantly surprised by the strong outlook from the company. We feel either the company is being positive to position the bonds for a par refinancing or there is a genuine V-shaped recovery. Other positives was the continued cost cuts that will mitigate any fall in EBITDA due to the downturn. The only negative is the elevated capex as the company is investing in new capacity to position itself for the upturn which is expected to continue in H1 2024. Hence leverage will remain elevated in the near term before improving in H2 2024.
Investment Rationale
We are taking a position in the notes representing 2% of NAV as we are modelling in an operational turnaround in H2 2024. If we feel the Q2 2024 results are going our way, we may deploy another 2% - 3% of NAV into this situation.
- The current trading price of the bonds give us 25 points of upside plus coupon over a twelve month holding period as the bonds have weakened over the past couple of months on weak construction data in Germany but rallied since the Q1 2024 results.
- Pfleiderer is a good business with a solid market position however it has been negatively affected by temporary macro headwinds driven by a weak German construction market and elevated interest rates. Our strong conviction on a recovery was strengthened by the strong outlook given by the company on their last earnings call and a 15% increase in their order book.
Some downside protection
- Strategic Value Partners will not walk away from the company and choose to inject equity in the company and offer economic incentives to RCF and bondholders to extend maturities.
- They have behaved similarly with a previous portfolio company that they own - Klockner Pentaplast. This could be a combination of upfront fees, increase in coupon and perhaps exit fees or synthetic warrants. In addition, if bond process weaken this year, SVP might even be an opportunistic buyer of the bonds as well.
Current Trading
- The reported a positive outlook for H2 2024 with the order book rising 15% and improvements in pricing from their peers. This was above our expectations as we were expecting a recovery only in 2025.
- Pfleiderer's revenues were €210 million (-26%). Revenues in Engineered Wood Products were €170 million (-26%) driven by reduction in volumes and pricing. Revenues in Silekol were €39.8 million (-24%) driven by volumes and negative pricing. This was worse than our expectations and in light of the outlook from the company, it appears to be the “trough” quarter or “close to the trough” quarter.
- Q1 2024 Adjusted EBITDA showed a decrease of €9.8 million or 33%. Adjusted EBITDA margin declined from 14% in Q1 2023 to 9.1% in Q1 2024. This was in line with our expectations as we expected EBITDA margins to decline though remain positive.
- The company’s cost cuts for 2024 of €29 million was in line with our view.
- On the negative and below our expectations, the company’s cash balance declined to €48 million and capex remained elevated as management remains focused on growth. This is expected to be financed via internal cash flows. Leverage is expected to peak in H1 2024 before improving.
Housekeeping
The next catalyst on this name will be the full reporting of the Q2 2024 financial results over the summer which may prompt a reaction to the trading levels of the bonds and our views. Given the sunny outlook from the company, we expect to see progress around cost cuts, pricing and some improvements in volumes and demand. We would also monitor the liquidity profile at the time of the Q2 2024 results.
Saahil
T: +44 203 192 0200
www.sarria.co.uk