Adler Pelzer - At Face Value - Model Update
All,
Please find our updated analysis of Adler Pelzer here.
At face value, the bonds look refinanceable. A tidy 1.5x FCCR should usually do. However, the picture deteriorates when taking into account the apparently low CapEx on which APG achieve this feat. A fully drawn RCF and last minute paid bonuses are putting the full suite of red flags on display, while the WC smoothing has ostensibly been achieved with a further push on payables. Still, it’s looking better than we thought.
Investment Rationale:
- Only shortly after taking the last short, we have had to close out the position on apparent lack of borrow. We still think this company is vastly overleveraged and is sweating its assets, even when factoring in the OWC line in the P&L. However, EMEA and NAFTA have held up better than modelled, and we have raised our 2026 projections slightly.
- We like management. Drawing the RCF in full ahead of extension negotiations and de-risking deferred compensation just in time (presumably the Faurecia / AST team), at least leaves nobody in doubt. It's therefore likely that the S.S. RCF is extended, which should buy APG another 6 months of wiggle room, deferring the ultimate deadline to October '26.
- We calculate recoveries in cash and debt form in the 70s, in a restructuring and in the 80s or 90s, depending on generosity of the shareholders in a deal. These figures are all 10%-points higher than last quarter due to the revenue beat in Q325, prompting us to bravely raise the forecast. But any higher nominal recoveries would trade at lower prices afterwards.
- On the upside, we struggle to see the shareholders approaching the bonds early, since there should be a negotiation ongoing between them. Even if a proposal came, we doubt it would initially be worth more than 95 c/€. As regards a frothy private debt refinancing, the First Brands situation might have cooled off that appetite for now.
Moving Parts:
- In Q325 EMEA has held up better than expected. We have lifted our projections as a result (bravely). If warranted, the company could come close to earning its interest (on a €90m norm. CapEx basis). Surviving comment from the Q225 write-up: "Unless European and NAFTA volumes abruptly stopped falling on July 1st and began growing instead, we have no way of modelling APG delivering on its EBITDA guidance for the year." Well, apparently they did, and we model €236m of EBITDA - close enough.
- Refinancing of the RCF is priced in, will only buy another six months, and the facility is small. The CFO on the Q325 call voiced his confidence that the facility (current) would be renewed. He has fully drawn it ahead of that negotiation. Considering the RCFs options, we expect the extension probably forthcoming. We therefore postpone the end of negotiations by 6 months to Oct. '26.
The Kettle is probably off the boil for another six months, and the next set of news should involve the (more than priced-in) extension of the RCF.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk