Flora - comment

Flora H1 results have left the bonds unchanged as the story remains in limbo. Operationally, the numbers were broadly positive, with Flora delivering four consecutive quarters of organic growth, stable EBITDA margins and a welcome recovery in the Americas, all against a backdrop of exceptionally low butter prices. However, cash flow remains muted, and leverage has crept higher to 6.9x, with H1 FCF significantly below prior years ( partly explained by WC).

Management has reiterated guidance for low-mid single-digit growth in sales and EBITDA, which, coupled with the LATAM disposal proceeds, will only marginally deleverage the balance sheet. With no looming maturities, KKR has time to find a solution, but the sponsor’s 2017 equity thesis has clearly not played out as expected. After nine years of ownership, organic growth remains limited, leverage is still 6.9x, and there is little scope for the business to delever meaningfully through cash generation alone. KKR therefore needs to accelerate its exit strategy. An IPO is unlikely at current growth and leverage levels, while a secondary LBO is unlikely to value in excess of 8-9x.  The longer KKR waits, the more the lack of earnings growth risks turning an equity exit into a capital-structure exercise.