Pasubio - Not yet - Model Update
All,
Please find our analysis on Pasubio post Q3 numbers here.
Following a successful trade in Pasubio’s bonds earlier this year, we continue to monitor the credit. This month’s results were immaterial, and given that the Company’s challenges are well understood, bond prices saw limited movement. Management’s comments regarding potential further price reductions under annual OEM contract resets were noteworthy; however, with no additional reporting expected until May, we do not see this as an opportune moment to re-establish our short position.
Investment Discussion:
- We previously covered our 3% tactical short in Pasubio’s 2028 Notes at 80% in late September, locking in a 7pt gain. We continue to believe that the bonds are trading richly, given the company’s poor debt capacity and weak interest coverage. However, with no upcoming maturities, ample liquidity, and no reporting expected until early May, we are not re-establishing the short at current levels.
- Earnings momentum remains negative, and the bonds are likely to be downgraded following the FY25 results. JLR, Pasubio’s second-largest customer, ceased production in Q3, and although operations have resumed, management acknowledged a ramp-up period that will weigh on Q4 demand.
- There also remains a risk that the Company may pursue further acquisitions in the Luxury Fashion segment. Management has not provided sufficient detail on potential cost savings or synergies between this division and the traditional automotive supply business.
- We expect the bonds to trade to a 15% yield, or around 80% (5pts lower), driven by a downgrade and muted FY25 performance. Conversely, we do not expect the bonds to trade tighter than a 10% yield (approximately 6pts higher) in the near term.
Recent Results:
- Our initial reaction to the Q3 numbers was that they were broadly in line with our projections. Revenue was €10m lower than expected, but stronger gross profit margins meant GP and EBITDA were only €2m below our estimates. Compared to prior year, EBITDA was lower, but given the JLR cyber issues and the Company’s own guidance, the market had anticipated the weakness.
- The Company provided limited guidance for Q4 but acknowledged that although JLR has recommenced production following the cyber attack, there will be a ramp-up period which will effect Q4 production at Pasubio.
- Management spent a considerable portion of the call discussing its pass-through contracts, as the Company is seeking improved pricing beyond those determined by those contracts. The underlying contractual mechanisms reflect movements in raw materials, which implies a slightly lower gross margin relative to Q1–Q3. Historically, OEMs implement this adjustment in the final calendar, although for JLR it will take place in Q1 due to its March fiscal year-end.
The Company will report its FY25 results in May 2026. We will continue to monitor trading levels closely and assess the appropriate timing to re-establish a short position.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk