Flora - Focus on the underlying business - Positoning

All,

Please find our updated analysis on Flora, post-Q1 results, here. 

While speculation about a potential sponsor exit continues and may offer longer-term upside optionality, it is unlikely to be a near-term transaction. In the meantime, we focus on the underlying business. The credit is supported by limited near-term downside risk, underpinned by strong liquidity and the absence of imminent maturities. As a result, Flora provides investors with two distinct yield opportunities across the capital structure, allowing positioning to be tailored according to individual risk appetite.

Investment Rationale:

- We are adding to our twin position in Flora Bonds, which was established in November 2025. Specifically, we are increasing our long exposure to the 6.875% Senior Secured Notes, adding to the position at a price of 96.5% and raising the allocation from 4% to 6%. We are also increasing our long position in the 8.625% Senior Notes at 83.5%, from 2% to 3%. While restructuring costs are expected to decline in the coming months, our key residual concern relates to the evolving sales mix, with a greater proportion shifting from developed to emerging markets. Given the absence of near-term maturities and the company’s strong liquidity position, we see limited downside risk over the short term.

- Restructuring costs will reduce, leading to deleveraging, which provides upside over the coming months. We expect the Senior Secured Notes to tighten marginally to 7%, or 2-3pts of upside, coupled with interest, provides 8-9% return over the next 6-12 months. The Sub bonds have greater upside, and should trade to c.10% yield or 6-7pts of upside. The yield differential between the two bonds is excessive for only 0.6x of leverage and should tighten to c.400-450bps from current levels. 

- Downside risk for the Senior Secured Notes appears contained at 3–4 points, reflecting the lack of imminent refinancing requirements. However, credit improvement remains constrained by limited cash deleveraging following significant restructuring costs incurred during FY19–FY21.

- Similarly, we see limited downside risk for the Senior Notes due to the absence of near-term maturities, with the next debt maturity not until July 2029. The bonds were weakly placed at issuance, offering an approximate 15% yield despite the issuer having no near-term refinancing needs and a reasonable equity cushion. KKR has not extracted dividends, having invested €2.9bn (10.4x EBITDA), and our DCF analysis implies a comparable 10x enterprise value multiple, which further limits downside risk.

- However, there is no clear near-term catalyst for a re-rating, and the senior bonds are likely to remain range-bound. There is some market expectation that KKR is pursuing an exit, with options including a full sale, break-up or IPO. KKR is evaluating an exit; any transaction appears unlikely to materialise in the near term and does not represent a credible catalyst at this stage.

Recent Results:

- Flora reported flat EBITDA, but this conceals a sustained volume decline across Flora’s developed markets. Flora achieves price increases coupled with growth in emerging markets, which results in flat revenue numbers. At the group level, pricing increased by 3.9% while volumes declined by 3.5%, resulting in net sales growth of 0.4%. In Europe and the Americas, volumes declined by 6.5% and 4.5%, respectively, with pricing growth of 2.8% and 3.8% mitigating, but not fully offsetting, the volume softness. Performance continues to be supported by the AMEA region, where volume growth of 10% and pricing growth of 8.5% contributed positively to overall sales.

- Leverage increased in line with expectations, reflecting seasonal working capital movements and interest payments. The more notable trend remains the continued volume pressure in Europe and the Americas, where signs of stabilisation have yet to emerge.

- The overall tone of the call was disappointing. Management remains focused on operations and shows little appetite for asset sales to accelerate deleveraging. The company reiterated full-year guidance, which sits slightly ahead of our projections. However, the sharp decline in butter prices across Central Europe, particularly in Germany and Poland, will likely keep volumes under pressure for the remainder of the year.

KKR exit:

- Recent reporting indicates that KKR is considering a range of exit options for Flora Food Group, including a full sale, a regional break-up or an IPO, with Goldman Sachs and Citi reportedly advising on the process. A Bloomberg report from February 2025 noted that a potential sale was shelved following discussions around a c.$10bn valuation, with 2026 identified as the earliest feasible timing for a listing or sale. More recent reporting from the Financial Times suggests that KKR is again exploring a possible sale at a valuation of up to $10bn, with informal discussions with prospective buyers said to be ongoing, although no final decision has been taken.

- These reports indicate that strategic alternatives remain under consideration, the timing and probability of a near-term transaction remain uncertain and do not, at this stage, represent a reliable catalyst.

- From a valuation perspective, we estimate enterprise value at approximately €7bn (c.$8.1bn), below the $10bn valuation referenced in market speculation. This DCF analysis implies an equity value below KKR’s original investment in 2017.

Credit Concerns:

- While we remain constructive on the credit, three key areas of risk warrant ongoing attention.

- 1 - Evolving business mix: Although reported sales and gross profit have remained broadly stable, underlying volume trends have weakened meaningfully. We estimate that the spreads segment has contracted by approximately 35% since FY20. Management has prioritised pricing and margin preservation rather than defending volumes, resulting in an estimated c.8% p.a. volume decline, which we view as a key structural consideration. This is partly mitigated by the expansion of non-spread activities, which have grown from around 17% of sales in FY17 to approximately 26% today.

- 2 - Restructuring costs and deleveraging: Elevated restructuring costs have historically constrained cash deleveraging at Flora. While these costs have trended lower over recent years, the company incurred approximately €55m of restructuring charges in H2 2025, including around €30m related to supply chain initiatives. Management guidance for FY26 implies a lower level of restructuring spend, though execution and delivery will remain an important area of focus.

- 3 - Relative value of the Norwegian bonds: The Norwegian bonds trade at a material spread premium to the Senior Secured Notes, at approximately 525bps. This reflects several technical factors, including heavy allocation at issuance, the absence of a change-of-control put, and a more limited buyer base for Norwegian bond paper. 

Happy to discuss. 

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk