Flora - Milking Time - Model Update - Positioning
All,
Please find our updated analysis on Flora post its Q3 results here.
We have had an excellent history with Flora, having invested in the previous Flora “sub” bonds in August and December 2022 at 62% and 72% respectively, which were refinanced over the Summer of 2025. We have been cautious on the new “sub” bonds, but with them now trading sub 85%, it is time for us to take a position. However, we retain some caution and have taken a blended position, primarily in the Senior Secured Notes.
Investment Rationale:
- We are taking positions in both the Senior Secured Notes and the Senior Notes to achieve a blended yield of around 10%, comprising a 4% long position in the Senior Secured Notes at 96.5% (YTM 8.1%) and a 2% long position in the Senior Notes at 83.5% (YTM 13.6%).
- The yield differential between the senior and subordinated tranches has widened to approximately 550bps, reaching our target spread. This remains primarily a yield play with limited short-term catalysts, and we expect the bonds to rally only following two consecutive quarters of volume growth. Should the Senior Term Loan holders agree to extend maturities to October 2030, spreads across the structure are likely to tighten, with potential upside of around 2pts for the Senior Secured Notes (yield compressing to 7.5%) and up to 7pts for the Senior Notes, contingent on sustained growth.
- Our cautious stance on the subordinated position reflects conservative projections; while the Company issued muted guidance with its Q2 results, we expect EBITDA post-restructuring costs to remain above €720 million, around 10% lower year-on-year, but with free cash flow after interest broadly flat to slightly positive.
- The bonds were initially poorly placed, which has led the bonds to fall to the mid-80s. Any further reduction in guidance could see the subordinated notes fall further to around 80% (a 6pt decline), though at that level the yield would rise to roughly 15%, likely attracting buyers given the absence of near-term maturities and the significant equity cushion beneath the debt. KKR, the equity sponsor, has not taken dividends, having invested €2.9 billion (10.4x EBITDA), and our DCF suggests a comparable 10x enterprise value multiple, limiting downside.
- We see limited risk for the Senior Secured Notes (3–4pts of downside) given the lack of near-term refinancing pressure, although the Company’s limited cash deleveraging, following substantial restructuring costs during FY19–FY21, remains a constraint on credit improvement.
Recent Results:
- Flora’s Q3 results demonstrated slightly stronger resilience than anticipated, with volumes declining by only 0.9%. Gross profit contracted by 250bps, primarily reflecting ongoing commodity and input cost inflation. However, recent price increases are expected to mitigate this impact in Q4. Our forecasts for FY25 remain marginally below the Company’s projections, as we had anticipated a further downward revision to guidance. Nonetheless, Flora has reaffirmed its Q2 guidance for the remainder of the financial year.
- Overall, performance was broadly in line with expectations. Continued softness in the US market and the weaker US dollar were offset by a modestly stronger performance in Europe.
- Leverage increased slightly to 6.6x (Company calculation), or 7.5x on a post-restructuring cost basis, but is expected to improve to around 7.3x by year-end.
Next Steps:
- The Company are not due to report its FY25 numbers until late March. However, we expect the Company will commence discussions with its Senior Bank lenders to extend the maturity of the Term Loans in line with the recently extended RCF facilities. If the Term Loans are extended to October 2030, in line with the RCF, it will leave the Senior Secured Notes as the next upcoming maturity, in July 2029. Any extension will see the Senior Secured bonds rally a couple of points.
- Q4 numbers should see a continuation of the price increase in Europe, which will support revenue guidance. Additionally, management reiterated its overall guidance for FY25, which is ahead of our expectations. Therefore, we remain confident that the Company will meet, and probably exceed, our projections for Q4. The seasonal working capital inflow in Q4 will further assist deleveraging statistics.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk