Pasubio - Many a slip between Actual and Proforma - Model Update - Positioning

All,

Here is our updated model following Pasubio’s Q4 results, here.

To take a long position, investors are required to make a leap of faith, moving from an investment in a traditional automotive supplier to the new Pasubio. While the group will remain auto-dominant, it now generates 15% of revenue from fashion, rising to 23% post-consolidation of all announced acquisitions, and c.25% of EBITDA from the fashion industry. It is notable that PAI, the equity sponsor, has not injected fresh capital to support this strategic pivot. Instead, it has funded acquisitions from the balance sheet and, more tellingly, relied on roll-over equity from the sellers of the acquired businesses. Disclosure between automotive and fashion revenues remains limited. However, based on historic revenues from the acquired entities, automotive revenues are clearly declining. While part of this reflects the JLR outage last autumn, the sponsor-led pivot away from autos is itself revealing.

Investment Decision:

- We previously generated strong returns from a short position in Pasubio and are re-establishing the trade ahead of the Q1 results later this month. We initiate a 3% short position at 91, targeting a move to the mid-80s following the Q1 release.

- This view rests on two key issues. First, the Luilor acquisition, which closed at the end of April, lacks disclosure on the equity purchase price and the level of reinvestment by the original owners. Luilor generates c.€30m of revenue and c.€5m of EBITDA; even assuming a conservative €15m cash outlay (3.0x EBITDA, excluding equity roll-over), Pasubio will need to draw further on its RCF and/or other facilities.

- Second, the company relies on extensive pro-forma adjustments, only some of which we consider justified. With the bonds rated single-B, a downgrade remains a risk.

- Downside to the short appears limited. At current prices, bonds yield c.11%. Given uncertainty around further acquisitions and ongoing weakness in the automotive sector, we do not expect the bonds to trade tighter than 9% YTM, equivalent to a 95 price, or c.4 points of downside.

- Upside comes from the market recognising the over-leveraged balance sheet and the strategic shift by PAI without fresh equity support. In this scenario, bonds could reprice to 15–18% yields, or prices in the low-80s, delivering 8–10 points of upside. We acknowledge that the company faces no near-term maturities and retains adequate liquidity over the coming quarters.

Segment Split:

- Despite several acquisitions, the business remains predominantly an automotive supplier. This segment recorded a c.10% revenue decline across FY24 and FY25, with EBITDA falling from over €60m in FY24 to c.€40m in FY25. We expect a modest recovery in FY26 and FY27; however, Pasubio will ultimately require a sustained top-line recovery to restore EBITDA to historical levels.

- In early 2025, Pasubio expanded into the luxury fashion segment, diversifying its end markets. Since the 2021 LBO, PAI and management have reportedly monitored the fashion leather industry as a means of reducing cyclicality. Pasubio pursued a consolidation strategy targeting suppliers to leading luxury brands, supported by commercial due diligence and engagement with end customers. In February 2025, Pasubio acquired SKIN, a commercial agent, followed by the acquisition of Antiba in May 2025, a leading industrial player in the sector. The group has one further fashion transaction pending, Luilor, expected to close in late May 2026.

- Taken together, these transactions increase fashion revenue from zero in 2025 to c.25% by early 2027. While the strategic rationale for the acquisitions is sound, and the fashion segment generally commands slightly higher EBITDA margins, execution risk remains elevated given the group’s leverage and limited equity support.

PAI’s commitment:

- PAI has not injected fresh equity since acquiring the business from CVC in 2017. Pasubio has funded all recent acquisitions and will fund pending ones through its own balance sheet alongside equity rollover from selling shareholders. The company does not disclose the level of minority ownership now embedded in the group. Our primary concern is the lack of transparency around minority shareholdings and how rollover equity sits within the overall capital structure.

- Allowing original owners to roll over equity also complicates integration and cost reduction efforts. These targets were typically small family-owned businesses, and without full control, restructuring and cost-cutting became materially more challenging.

- Management has stated that it has engaged with more than 20 independent tanneries in Tuscany, where participants broadly acknowledge the need for consolidation. If Pasubio positions itself as the vehicle for sector consolidation, this strategy will require fresh equity support from PAI. To date, PAI has provided none.

EBITDA adjustments:

- We acknowledge that it is inappropriate to rely on the reported EBITDA of €39m. However, as with several other credits, we also cannot justify the €69.4m figure presented by the company. We accept the incremental EBITDA contribution from acquisitions completed during the year, but not reflected in the reported numbers. This includes two months of contribution from SKIN and five months from Antiba, together amounting to c.€6m, alongside additional add-backs to adjust for the five-week JLR production shutdown. On this basis, we estimate adjusted EBITDA of c.€50m.

- Our leverage analysis uses FY26 expectations, including the yet-to-close acquisition of Luilor, expected in May. The company has released no details on valuation or funding. We expect Pasubio to fund the transaction partly from the balance sheet, with a meaningful portion represented by rollover equity, which should limit incremental leverage from the acquisition.

- Even allowing for this, we expect FY26 leverage of 5.9x, reducing to 5.6x by December 2027. This assumes improving EBITDA margins, 4% annual growth in fashion revenues, and flat automotive revenues, adjusted for the five-week JLR shutdown and related lost sales. 

This trade is a short-term trade, with Q1 results expected by end of May. Happy to discuss. 

Tomás