Adler Pelzer - Only The Penultimate Hour - Model Update
All,
Please find our updated analysis on Adler Pelzer here.
Windows are dressed (admittedly with quality dressing: having reduced primarily overdue receivables), margins are bolstered with €10m+ of timely settled extra insurance proceeds, RCF is mostly paid down, for which excess JV cash was (or had to be) repatriated, CapEx is squeezed far below depreciation or historical standards or usual auto supplier levels, and even some shareholder loans have been equitised, keeping at least book equity stable. For the purpose of refinancing, then, this should be as good as it gets. Q1 is seasonally a cash outflow affair, and it's almost over. But this is not the final juncture.
Investment Rationale:
- We remain on the sidelines, as borrow seems to be hard to find. Following the most recent drop, the bonds are beginning to look tempting, but for the ten points of upside + 1/2 a considerable coupon we would not risk either of the two downside scenarios: 1) the deal does not come together and bonds drop into the 70s on uncertainty, before perhaps eventually recovering to fair value in the 80s, or 2) the refi/A&E is successful and the bonds drop towards fair value on the other side of it - perhaps too soon for us to get out. Instead, we will be looking to short the new bonds if the cap stack is not reduced in the process. The current proposal (we understand) of reinjecting €15m of equity is not sufficient from our perspective.
- We expect the RCF to afford the company maximum time for negotiation. That should give the bonds until end of September to find a refinancing / A&E deal. Thereafter, we'd expect legal preparations. Because Q126 should be seasonally an outflow quarter, we think there will be two key negotiating periods. This current one until reportings in April on the basis of Year-end liquidity figures, and a last one into September, by when APG might have recovered that WC again. The latter period might also be the one in which potentially the Hayashis might make a better offer.
Key Conclusions:
- The bride is now as pretty as can be. Q425 saw a large collection of receivables (mostly overdue) and repatriation of cash from Chinese JVs to pay down the RCF as promised. We expect the RCF, therefore, to extend with a springing maturity, which should give APG six extra months to get the refinancing done. In that context, we understand there is a proposal to reinject €15m of equity (Recent Trading), not enough for us, but perhaps for others.
- Margins have expanded through cost cutting despite lower volumes, but Q425 was bolstered by insurance settlements. Also, FCF is flattered by sub-par CapEx to appear refinanceable (Recent Trading).
- The most plausible recap scenario involves diluting the Scudieri family and transferring majority control to the Japanese shareholder in return for a dividend clawback and an additional €40m equity injection to achieve an A&E. The Scudieri's would retain some value and bonds. Even if the RCF extends with springing maturity, the bonds have little more than 6 months to refinance (Recap Scenario).
- Bondholders could capture equity value via a minority equity stake or a €45m second-lien PIK instrument, though both hinge on shareholder cooperation and a growth scenario (Recap Scenario).
- Under a normalised CapEx assumption of 4.5% of revenues by 2028, leverage capacity lies at 80-85c/€ and thus 15-20% equity exposure in the bonds (DCF).
Current Trading:
- The latest margin expansion may not be fully sustainable, and the pay-down of the RCF and other debt seems to have required all the resources management had available.
- Tooling revenue was strong in Q424, and apparently particularly weak in Q425. The EBITDA effect, however, seems to have been cushioned with timely insurance settlements.
- European volumes continue weak, and Mercosur is under pressure from FX. China continues to do well, and NAFTA seems to begin to grow - tacitly. We expect European volumes to stabilise this year.
- Q425 looks like the company made an effort to tidy up its liquidity and minimise gross debt. Management will be negotiating with the RCF to give it more time, but the bonds turn current in April.
- CapEx continues well below long-term average, flattering cash flows amid last minute refinancing efforts. Q1 (through March) tends to be a seasonally cash consuming quarter.
- Surviving comment from Q325: We think the Faurecia AST management has taken its chips off the table with a €21m deferred comp payment in Q3 ahead of negotiations. Do we need more red flags?
Here to discuss this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk