SGL – new position
All,
Please find our updated analysis here.
We are buying the straight bonds for 3.5% of NAV at around 92 (YTM7.2%). We are also buying the converts for 1.5% of NAV at around 82 (YTM10.2%). We estimate that the straight bonds could return to 100 as investors begin to pay attention to the significant improvement in FCF generation. The converts, which are subordinated to the straight bonds, are also fully covered and should converge to par over time, depending on the perception of investors around SGL Carbon and the auto sector.
FCF positive: SGL’s performance so far this year suggests that a major change in the group’s credit profile has taken place even before any actions by the new management. The return of FCF generation after interest is now visible. The three major drivers of this improvement are unlikely to go away completely in the next 2-3 years. These are: Capex reduction, crude oil prices, the European manufacturing recovery and cost-cutting actions undertaken by the previous management before covid struck.
Crude oil: SGL, like Klockner Pentaplast, CMA CGM and other “short oil” names, have benefitted significantly from the depressed oil product environment. The main raw material for carbon fibre production (CFM) is priced off crude oil. Gross Margins has spiked in Q2 and Q3 20 thanks to this impact, which more than offset the impact of lower volumes. We expect this impact to persist into 2021, while the market for oil products gradually normalizes over mid-late 2021.
European manufacturing: European manufacturing PMIs have returned to expansion level several months ago. Even as the positive impact from low crude oil prices goes away, we expect this to continue.
Liquidity: should remain strong, thanks to the decent FCF generation, the “double-digit millions” mortgage loan in Germany, and the EUR18m Showa Denko payment, which should mostly offset the USD62m payment from the buyout of BMW’s 49% minority stake in Moses Lake.
Please feel free to reach out if you would like to exchange ideas on the name.
Juliano
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E: jtorii@sarria.co.uk
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