Pro-Gest - Staying on target.
All,
Please refer to our unchanged analysis here.
Its good news, even if since our mail on the firing-up of the power plant 3 weeks ago, the start-up of the production line was largely a foregone conclusion.
Expenses: We estimate that Mantova will take most of December to calibrate the machine before being able to offer commercial-grade paper in the new year. We, therefore, expect the company to recognise all start-up expenses in FY20 - ending in December - and thus present a clean 2021 showing only the gradual ramp-up of the plant.
Gradual Ramp-up: Management have already flagged that the ramp-up will take time. This has engineering and notably commercial reasons: Pumping 400kt into a saturated commodity market would only destroy prices. So our expectation is that the ramp-up to 400kt will take all of next year.
Liquidity: Pro-Gest benefits from high raw material inventory bought at very low prices in 2019 and 2020. Therefore the ramp-up should not strain liquidity beyond the running costs of the plant and other ramp-up related issues. In our model inventory liquidation largely offsets XO expenses.
Position: We remain long Pro-Gest bonds for what has swollen to a 6% of NAV position and look forward to improving leverage and liquidity over the next year as well as possibly a refinancing of its scattered financing arrangements. The bonds only offer some 8% YTM in the low 80s, but we are confident that the company’s idiosyncratic improvements next year will provide for a faster appreciation than straight 8% YTM suggests.
Wolfgang
___________________
E: wfelix@sarria.co.uk
T: +44 203 744 7003