Pro-Gest - Paper available
All,
Please refer to our long-ago shelved analysis here.
We understand there is “paper" available in the Pro-Gest SUNs, following the company’s recent halt of its paper mills. Having been long the bonds since the 60s in 2020, we exited last year and have not since updated our analysis. But even so, we think we know the company assets, paper market behaviour, capital and legal structure well enough to have an opinion on the bonds in this environment. Should we hear of more volume in the bonds, we will update our analysis and consider a position on prices available then.
Shut-down:
- The shut down that was announced on March 7th concerned “only” the company’s six paper mills, including the dominant plant in Montova. The company’s downstream activities in corrugated paper and packaging continued to run during that period.
- The shut down lasted only some 10 days and plants are running again. However, we expect this manoeuvre to have resulted in considerable waste production and have been surprised that the opportunity was not used to perform upgrades or maintenance.
- Motivation for the shut down was the sharp increase in energy cost in Northern Italy. Like Germany, Italy is heavily dependent on Russian imports and paper mills require significant energy. Also, the mantra incinerator has has to remain shut as a condition to the reopening of the plant in 2020.
- In the 10 days following the announcement of the shut down the energy price is unlikely to have fallen to a point where production made no sense to a point where it makes sense again. We therefore assume that management’s primary motivation here was to prompt a political commitment from the city / state to subsidising energy or otherwise make available economic relief.
Energy Cost environment:
- In 2020, Progest spent €40m on energy, mostly in the form of natural gas. We have no details, but assume the cost would rise by at least €10m on the full operation of the Mantova plant.
- As per the Q3 presentation, energy costs had already risen four-fold on a run-rate basis and in the FY 2021 press release Bruno Zago complained that gas prices at the end of 2021 were 5x higher than at the beginning and that since then they had doubled again.
- On a run-rate basis therefore, Pro-Gest should in theory be looking at an annualised headwind of €400m+. Clearly that cannot last.
Pass through behaviour:
- If testliner margins on wastepaper are any guidance, the market is typically quick to adjust the price of one to the price of another. Delays to shocks can take a month or two to pass on the bulk and rich as well as poor margin periods tend to last only up to 6 months in most cases. So if the same is true for energy costs, Pro-Gest has little to worry about.
- However, the waste paper market is not as liquid and prices cannot be hedged as easily as energy. So the speed of margin adjustment in the market could be materially altered with the amount of hedges the players have in place.
- Pro-Gest have traditionally been forward hedged for approx. 1 year, but have abandoned efforts in H221 amid rising prices (cost to hedge). We do not know about its competitors.
Liquidity:
- €150m of liquidity at year end are plenty. The company typically does not burn more than €10m per month in idle operating cost.
- Hedges should be running for another three months from now, although we are not sure what percentage of costs is currently hedged.
- On the math published by the company (and substantiated elsewhere in the economy), Pro-Gest could see outflows of €80m per quarter in the summer - if prices do not come down rapidly and already assuming a grinding halt in CapEx.
- Pro-Gest would not be alone. Half of Northern Italy would be in the same boat, as well as Germany. By general comparison Pro-Gest is quite liquid and in such a dystopian case should be among the last remaining solvent industrial companies in Europe.
Investment Considerations:
- Pain is surely coming Pro-Gest’s way and considering the legal structure, bonds should have no leg to stand on if the company were forced to enter a Concordato Preventivo. However, on a normalised basis the company is making reasonably attractive margins. And so investing in Pro-Gest bonds at close to 80c/€ is a bet on gas prices either falling back into range or Italian companies receiving subsidies to compensate for the higher levels. These would have to be introduced soon.
- Upside should come from a swift end to the Ukraine war - which despite certain relaxation around the Kyiv area does not seem to be immediately feasible.
- Downside comes from continued high energy prices and a delay in government subsidies. We’d expect Pro-gest to close all mills again and conserve its cash for better days with some €10-15m/month attrition that should see it through to next year - depending on any Carlyle small print.
We have not yet dusted off our analysis any further, but please reach out to discuss.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003