Fedrigoni - Better to be punctual - Model Update - corrected

All,

Please find our updated analysis on Fedrigoni here.

Considering the renewed sell-off of luxury equities this year, the bonds once again look richer than Fedrigoni’s end clients. While GY26 should largely be a sideways affair for the packaging company, its leverage stats look set to rise well beyond maintenance covenant capacity, a picture that looks out of line with the near par pricing of its SSNs. To avoid drifting, we’ll consider more punctual short positions closer to the reporting times.

Investment Rationale:

- We are not taking a position in Fedrigoni while credit stats are softening and the company is set to exceed its leverage maintenance covenant in the next six months. Too expensive to short for too little downside (in case of the SSNs) and too unclear a time frame, we are conceptually still considering the name from the long side, but at 77c/€, or a near 25% YTM, the HoldCo Notes are still not cheap enough, given they are PIK Toggles. Also, without any upcoming positive catalysts, the SSNs should trade off into the low 90s during the year, even if the sponsor cures a covenant breach. So we don't see a need to jump in now.

- In the long-term we see Fedrigoni able to grow into its capital structure. The current weakness seems primarily cyclical, and without (major) maturities before 2029 and sufficient liquidity, we see no reason why the company should be in so much trouble as to endanger its investors. Equities in the luxury space have traded off again, so away from idiosyncratic news, we'd be waiting for those to return before going directionally long Fedrigoni.

Key Conclusions:

-  As we expect the company to exceed its net leverage maintenance covenant in Q226, debt-carrying capacity is a mere ~65% of the SSNs. Liquidity pressure remains contained with a large RCF that will be half drawn in 2026, but still sufficient. (DCF/Valuation). It's not pretty, but the company has extensive baskets available, and we don't expect the covenant to pose particular problems to the company.

- Fedrigoni’s Q3 2025 results show continued cyclical weakness in both divisions, with true price pressure—particularly in PLCS, but also in FSA—still obscured by the annualisation of acquisitions (Recent Trading). Management contends that the Q225 downstream destocking is largely complete, suggesting that any operational rebound would materialise from Q4 onwards and into FY26.

- A historical pro-forma consolidation of recent acquisitions reveals how the deterioration is accelerating in both divisions. Following Q3, we have modestly reprofiled our FY26 revenue assumptions and incorporated guided efficiency gains, yet on a consolidated basis, FY26 P&L should still appear broadly flat as acquisitions annualise (Model).

- Margins are improving, evidencing a slow pass-through of efficiency gains and cost cuts, supporting delivery on 2025 guidance (Recent Trading). Working-capital stats suggest prior outflows are abating, with payables now aligned to lower stock levels, reducing near-term cash drag.

- On these assumptions, EBITDA remains too low to translate into free cash flow as much as it normally would. Even if we assume a 5% revenue rebound and a +1% gross-margin gain in 2027, depressed EBITDA and elevated CapEx/one-offs limit FCF conversion, and DCF valuations fail to reach a weighted average of peers such as Stora Enso, UPM or Avery Dennison (DCF/Valuation).

- The group’s fragmented footprint and ongoing bolt-on M&A obscure profitability by site and dilute scale efficiencies (by the usually more commodity oriented industry standards), limiting investor visibility and confidence (Company and Industry). Fedrigoni’s niche exposure to premium papers and speciality labels provides partial insulation from commodity-paper cyclicality, yet demand remains closely tied to packaging, luxury and print—markets tied to consumer sentiment. 

- Finally, despite its 2000 pages worth, documentation analysis reveals weak structural creditor protection. Numerous baskets offer only limited cumulative capacity, but should the company need to reduce leverage, permissive asset-sale clauses and a low 75 % super majority amendment threshold (typical for Italy) are virtually begging for drop-down and uptiering transactions (Game Theory).

Next Catalysts:

- It is worth following the health of and developments in the luxury industry

- Q4 results will be published in May.

- Q1 results follow in June.

- Q2 results are in September - possibly accompanied by a notice that net leverage has exceeded the maintenance covenant level.

Here to discuss this name with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk