SGL Carbon - passing on through to the shelf

All,

Please find our unchanged analysis here.

The recovery in volumes and profitability that we had modelled was eventually evident in the strong H221, which also marked our exit at the time. 2022 is going to be tougher due to the explosion in energy costs, which SGL will have to try and pass on to their customers. Management is also expecting a less favourable business mix in Carbon Fibres. However, with €221m of cash on hand SGL Carbon is in a strong position to withstand these pressures and we expect the company to redeem the SSNs in 2023. We will therefore shelve our coverage of the name.

Outlook:

- Even with higher costs our modelling has SGL generating €60m of free cash flow in 2022, covering its interest costs of €40m.

- Next year's EBITDA will be £10m to £30m lower (vs the €140m in 2021), depending on SGL's ability to pass on higher energy and raw material costs and on volumes, SGL can push through in the wind business.

-We have modelled the additional headwind for energy costs at around €20m in 2022, with a three-quarter lag in recovery (see below)

Energy cost headwind of €20m:

- SGL ended 2021 with €221m of cash on hand. This buffer will protect it from delays and outright difficulty in passing on cost price inflation to clients.

- We estimate power costs of €130m for 2021. SGL used 1,268GwH of power in 2021. H1 costs in the EU were around €0.13 per KwH in H121 (Eurostat). From market data price rises were >20% in H2.

- For a very large user, our analysis shows that the cost of power per kWh is closer to 75% of the average (this is the figure using data from the UK).

- Since October, the natural gas benchmark Dutch TTF has risen >100%. The huge rise in natural gas prices in Europe will need to be passed on to end clients. This process has only started and will not be smooth. At the very least, we expect some timing delays.

- Overall power costs this year will be around 50% higher with the burden falling harder on smaller users who cannot buy forward or hedge. We are modelling for a cost headwind pre hedges and recoveries of €50m. SGL had already begun increasing hedging due to the cost rises in H221.

- We assume around €20m to be covered from the hedging indicating a 35% price shock vs a 50% price shock. We also expect the security of supply will help the pass through negotiation and we are estimating that SGL will be able to recover 50% of the difference.

- This leaves a headwind of around €20m vs guided EBITDA of €110m - €120m.

- SGL's 2022 energy requirements have been secured with 84% of gas and electricity hedged, however, we have no further detail on when the hedging programme was stepped up.

- Management acknowledged that shutdowns on the customer side also are a risk in 2022. This includes possible issues at automotive manufacturers due to semiconductor shortages but also if energy prices continue to spiral.

Loss of BMW i3:

- On June 22 the BMW I3 ceases production. SGL intends to replace the revenues (in the Carbon Fibers division) with lower margin wind energy business. The profitability of the i3 contract is not public.

- The Carbon Fiber division made €54.5m in EBITDA in 2021 and the number of i3s sold has been falling since the discontinuation was announced last June. The long tail of business has allowed SGL to plan for this eventuality.

Investment Considerations:

- We have exited our positions last year on the completion of the company’s turnaround and simultaneously the reduction in the convertible option value. The company has stabilised and benefits from good liquidity. For the moment there is little to do for us in this name and we are shelving coverage as a result.

As always, we look forward to any views you all may have on this.