Flora - Time For KKR To Exit - Model Update

All,

Please find our updated analysis on Flora, following the Q2 results, here.

KKR has owned the Company since 2017 and, having extracted no dividends, needs to engineer an exit. However, the underlying business continues to struggle to generate meaningful growth, while actual leverage remains c.7.0x. This is increasingly testing investor confidence, particularly at the Senior Notes (sub) level, which also carry unusual documentation from the Nordic bond issuance.

Despite these concerns, we are maintaining our twin long position. We believe the downside remains limited by the lack of near-term maturities, strong liquidity and the equity value supporting the capital structure. More importantly, even assuming close to zero revenue growth, the high EBITDA-to-cash conversion supports a c.10x valuation. KKR therefore has time to find an exit, although the lack of deleveraging makes the sub bonds vulnerable to changes in equity valuation.

Investment Rationale:

We are maintaining our twin long position in Flora, established in November 2025 and added in May. Our 6% long position in the Senior Secured Bonds trades at 97%, yielding c.8%. With no near-term liquidity concerns, we see 1–2pts of upside which, combined with the coupon, provides an 8–10% return over the next 6–12 months.

Our 3% long position in the Senior Notes (subs) was established at an average price of 82%, versus a current price of 78%. We continue to see limited short-term downside, although the current earnings trajectory provides little catalyst for a re-rating. We therefore expect the c.11% coupon carry to remain the primary source of return in the near term.

Restructuring costs should decline in the coming months. Our key residual concern is the evolving sales mix, with a greater proportion of revenues shifting from developed to emerging markets. However, strong liquidity and no near-term maturities materially limit the short-term downside.

Flora has struggled to deleverage since KKR took ownership in 2017. While we expect FCF to remain positive, actual cash deleveraging should remain limited, constraining the pace of credit improvement.

Upside: We expect the Senior Secured Notes to tighten towards a 7% yield, implying 1–2pts of price upside. Combined with the coupon, this provides an 8–10% return over the next 6–12 months. We are lowering our target for the Sub bonds to c.14% yield, implying 6–7pts of price upside. The 835bps yield differential between the two bonds remains excessive given only 0.6x of leverage separates them, and we expect this to tighten towards 500–550bps.

Downside: We see Senior Secured downside as contained to 3–4pts, given the lack of imminent refinancing requirements. Credit improvement, however, remains constrained by limited cash deleveraging following the significant restructuring costs incurred during FY19–FY21.

We similarly see limited downside in the Senior Notes. The next debt maturity is not until July 2029, while the bonds were weakly placed at issuance and offered an approximate 15% yield despite the lack of near-term refinancing requirements. KKR has invested €2.9bn at entry, equivalent to 10.4x EBITDA, without extracting any dividends. Our DCF implies a comparable c.10x enterprise value multiple, providing a meaningful equity cushion.

The DCF also highlights the risk at the unsecured level. We estimate debt capacity at c.€5bn, sufficient to cover the Senior Secured debt but leaving limited value for the Senior Notes. KKR is unlikely to risk losing its equity over a relatively small €400m unsecured bond, but this illustrates the precarious position of the unsecured bondholders and their limited recovery cushion.

There is no clear near-term catalyst for a re-rating and we expect both bonds to remain broadly range-bound. Market speculation that KKR is considering an exit remains a potential longer-term catalyst, with options including a full sale, break-up or IPO. However, we do not expect a transaction to materialise in the near term and therefore do not rely on an exit as a catalyst.