Pasubio - Seeking diversification - Initiation | Positioning
All,
Please find our initiation on Pasubio here.
Pasubio’s recent trading levels have prompted us to take a closer assessment of the company. As PAI seeks to shift its strategic focus away from the automotive sector, there are inherent execution risks associated with this transition. The business remains fundamentally exposed to the automotive industry, which continues to influence the broader outlook for the company. The current level of leverage raises questions regarding the feasibility and pace of the diversification strategy, alongside concerns about how this will be financed. While we do not identify any immediate liquidity issues, the prevailing sentiment suggests a likelihood of further negative developments relating to the company.
Investment Rationale:
We are taking a tactical 3% short position in Pasubio's 2028 Notes at 87%. The bonds are trading rich given its reduction in revenue and interest coverage. We acknowledge that there are no upcoming maturities, and liquidity is ample in the short term. However, the momentum is negative, and the bonds are likely to be downgraded in the coming months, and with JLR, Pasubio's 2nd biggest customer, ceasing production in Q3, it should cause some downward pressure on the bonds.
- The bigger impact on bond prices will be any future acquisitions in the Luxury Fashion segment. The Company has not provided much detail on the potential cost savings and synergies between the fashion and its traditional auto supply business.
- We expect the bonds to trade to a 15% yield or to 80% (8pts lower) on the back of a downgrade and lacklustre Q3 results. Bonds are unlikely to trade tighter than 10% in the short-term, or 4pts higher in the coming months. We will reassess the position post the Q3 results in November.
Summary:
- Pasubio is a vertically integrated Italian leather producer supplying premium/luxury automotive interiors to a concentrated OEM client base, with Porsche and JLR as top customers. In 2019, Pasubio had a c.11% market share of the high-quality automotive leather market.
- The company faces a refinancing in late 2027, with current projections highlighting the low interest coverage and lack of EBITDA growth.
- As part of the acquisition by PAI, the Company acquired businesses in Mexico and South Africa, in an attempt to diversify its client base and lower costs. Subsequently, in 2025, the business has expanded into the Luxury Fashion segment, supplying treated leather to major fashion houses.
Key Value Drivers:
- Diversification: Both a value driver and key risk, but the diversification into a new segment, Luxury Fashion, will have a large impact on the creditworthiness of Pasubio. Management has outlined the initial two acquisitions as phase 1, with Pasubio intending to execute on phase 2, consolidating the highly fragmented Italian fashion tannery market.
- Potential upside from an M&A roll-up in the Italian tannery market, but difficult to execute given the current high leverage levels.
- OEM production levels, and especially the premiumisation of the auto market. With the advent of electric cars, OEMs are increasingly using leather as a differentiator, boosting content-per-vehicle and pricing power.
- New Markets & Synergies: Expansion into North America and Asia, acquisitions, create scale, diversify customers, and tap new luxury leather demand.
Key Risks:
- Leverage: Pasubio's cash flows are not strong enough to allow for refinancing at the moment, leaving significant risk that a refinance on good terms does not happen, and creditors are left out of the money.
- PAI did not provide additional equity support for recent acquisitions. Further acquisitions are expected, but may continue to be financed from internal sources.
- Concentration Risk: High reliance on Europe (~90% revenue) and a small number of OEM customers increases vulnerability to demand or relationship shifts. This may be highlighted in Q3 numbers with JLR lowering its production due to a hacking incident. Additionally, Porsche has just reduced its EV forecast for FY25.
- Execution Risk: Success depends on delivering synergies and returns from debt-financed acquisitions and new factory ramp-ups before refinancing.
Recent Trading:
- Q2 continued to be a difficult quarter in the automotive sector. Revenue declined by 16% driven by volume reductions, particularly in European luxury automotive, which was down 21%. External factors, including US tariffs and macroeconomic uncertainty, continue to lower revenue expectations. EBITDA declined by 45% yoy, primarily driven by reduced volumes. EBITDA margins have stayed in the double digits, showing some operational resiliency.
- Fashion, a small segment, showed some growth, driven by increased market share and share of wallet. Key clients include Hermès, Chanel and Bottega Veneta.
- Pasubio secured some project wins, including BMW G72, where they will be the exclusive supplier from 2027 to 2032 and exclusive on the ICE Porsche Cayenne (majority share on EV). Additionally, exclusive supplier of Jaguar Panthera and Bentley BEV platform.
- Pasubio have initiated some working capital optimisation, and specifically in the fashion division, which is expected to yield results by year-end. Fashion underperformed in the quarter, but is expected to recover and meet guidance for FY25.
Next Steps:
- We have attempted to speak to the Company in relation to a couple of outstanding issues, particularly to clarify the minority shareholdings and how roll-over equity is accommodated in the structure.
- The Company is expected to release its Q3 results in early November.
Happy to discuss.
Tomás
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk