Pro-Gest - We'll miss you
All,
Please refer to our unchanged analysis here.
As good as it was, we are nearing the end of our investment thesis. Pro-Gest has been one of the rare fundamental trades this year that was not primarily related to Covid-19. With the start-up of Mantova the company is now in a much more stable position than it was in 2019 and our investment thesis is coming to an end.
October / November:
- Q3 results were good, if not as good as we had modelled. By contrast, Q4 so far seems to be making up for the drop in Corrugated and Other sales. For the 11 months through November Pro-Gest sales are on par with 2019 - a weak year, given August 19 maintenance shut-downs and other troubles. Meanwhile, the start-up of Mantova is progressing apparently well.
P.P. Notes:
- As expected, these notes are secured and issued structurally sr. out of:
- Villa Lagarina E90m
- Tolentino E35m
- Carta Italia E50-75m (second phase)
- We estimate the notes to carry an 8% cash coupon + a PIK element. Details have not been disclosed.
Working Capital:
- WC projections were the negative news of the call and explain the additional E75m p.p.
- We estimate that Pro-Gest have amassed some E47m of excess inventory, the vast majority of which still appears to be lying in front of the Mantova plant as waste paper, waiting to be converted over a period of 4-5 months as that plant ramps up.
- The company estimates 2021 sales from Mantova to reach some E100m, which would require a WC build-up of E50m (50%). So the excess inventory should go a long way towards offsetting the build-up. However, the E100m Mantova sales are likely to grow to E150m in 2022 and in any event the plant is expected to ramp up to the full 400kt production over the year. So a large part of the additional E75m p.p. notes from Carlyle is expected to be used for WC ramp-up.
Back of the Envelope - only mildly deleveraging in the medium term:
- The company is planing to delever, but the estimated Carlyle coupon is explained quickly. Putting the model to one side, how do CFs stack up in the roughest terms going forward:
- LTM : Sales: E440m, Adj. EBITDA E75m (17%), total debt: E500m, Net EBITDA-X: 6x, FCF E40m (50% conversion), PF. Fines E19m p.a. for 2.5 years, interest payable and limited liquidity...
- 2021: As 2020 plus Mantova Sales E100m and EBITDA E20m (contribution should be higher, but perhaps not initially at low volumes) and WC build-up of E50m. Therefore total Pro-Gest Sales: E550m, EBITDA: E100m (18%), total debt: E590m, Net EBITDA-X: 5.25x, FCF E50m (50% conversion before fines), PF. Fines E19m p.a. for 2.5 years, P.F. Cash Interest: E30m (5.5% before PIK) = NCF flat.
- 2022: As 2020 plus incremental Mantova Sales: E50m, EBITDA: E20m (30% total contribution margin less E5m in add. opex). Therefore total Pro-Gest Sales: E600m, EBITDA: E115m (20%), total debt: E600m, Net EBITDA-X: 4.6x, FCF E60m (50% conversion before fines), PF. Fines E19m p.a. for 2.5 years, P.F. Cash Interest: E32.5m (5.5% before PIK) = NCF of E8.5m.
Significant upside:
- The back-of-the-envelope calculations above assume constant market conditions going forward. However, the paper spread in Italy is tight and equilibrium is probably higher. So a widening of that spread to levels seen pre Coronavirus is likely.
- Spreads had particularly widened following China’s withdrawal from the European waste paper market, which has significantly depressed waste paper prices in Italy. To which extent these levels will be reached again or will have to be passed on to the market is not clear. But even so, spreads prior to 2017 have also been wider for some time than they are today.
Outlook:
- P.F. for the Carlyle transactions, Pro-Gest will have ample liquidity and three years without significant maturities. In this market therefore we expect the 2024s to tighten further and will be exiting this very successful investment in due course.
Please reach out to discuss,
Wolfgang
________________
E: wfelix@sarria.co.uk
T: +44 203 744 7003