Flora - Spreading It Thinly - Q3 26 · Model Update

All,

Please find our updated model here.

Note: Beta testers can check Flora on the portal here..

The reduction in FY26 EBITDA guidance does not come as a surprise. Our previous model, updated following the Q2 results, already forecast a decline in FY26 EBITDA versus FY25. Management now expects flat EBITDA year-on-year, below its previous guidance of low-to-mid-single-digit growth. However, the continued volume declines, particularly in the Americas, are more concerning. While these are being driven by lower butter prices, which may eventually rebound, leverage remains stubbornly high despite the pricing actions taken to protect margins.

Investment Rationale

We are maintaining our twin position in Flora's bonds, 6% long in the Seniors and 3% long in the subs, but are taking a more cautious view on the credit.
Flora continues to benefit from a reasonable liquidity position and no immediate refinancing requirements, limiting near-term balance sheet risk. However, the company has struggled to generate meaningful cash deleveraging since KKR's acquisition in 2017. While we continue to expect positive FCF, actual cash deleveraging is likely to remain limited, constraining the pace of credit improvement.
Senior Secured Notes: We are maintaining our 6% long position. The current yield continues to provide reasonable carry, while the absence of near-term maturities and the company's liquidity position provide some protection against downside. However, given the weaker earnings trajectory and limited prospects for deleveraging, we are becoming less convinced that there is meaningful scope for further spread tightening.
Senior Unsecured Notes: We established our 3% long position at an average price of 82% in November 2025, versus the current price of 75%. Although the bonds continue to offer attractive carry and we see no immediate refinancing concerns, the weaker volume performance reinforces our view that there is unlikely to be a near-term earnings catalyst to drive a re-rating. Debt capacity falls just within the Senior Secured Notes, leaving the SUNs very exposed. While the yield pick-up is substantial (c.1,200bps) for only c.0.7x of additional leverage, the continued volume declines, driven by lower butter prices, are a cause for concern.
Upside: We maintain that the Senior Secured Notes have 1–2pts of upside, tightening towards a 7% yield. Coupled with interest, this provides an 8–10% return over the next 6–12 months. We have lowered our target for the SUNs to c.14% yield, implying 10pts of upside. The yield differential between the two bonds remains excessive given that only 0.6x of leverage separates them and should tighten towards 550–600bps from the current 850bps.
Downside: Downside risk for the Senior Secured Notes appears contained at 3–4pts, reflecting the lack of imminent refinancing requirements. For the SUNs, the next debt maturity is not until July 2029, and the bonds were weakly placed at issuance, offering an approximate 15% yield despite the absence of near-term refinancing requirements and a reasonable equity cushion. KKR has not extracted dividends, having invested €2.9bn at entry, equivalent to 10.4x EBITDA, while our DCF analysis implies a comparable 10x enterprise value multiple. These factors provide some protection against downside across the capital structure, although credit improvement remains constrained by limited cash deleveraging and the significant restructuring costs incurred during FY19–FY21.
However, there is no clear near-term catalyst for a re-rating, and we expect both bonds to remain broadly range-bound. There is some market speculation that KKR is considering an exit, with options including a full sale, break-up or IPO. While an exit remains a potential longer-term catalyst, we do not expect a transaction to materialise in the near term and therefore do not view it as a credible catalyst at this stage.