14 November 2019 by jbchevrel
K+S Aktiengesellschaft (SDFGR) is a German fertilizers manufacturer/marketer which serves both the agriculture and the industry, globally. SDFGR also produces salts, for different applications (de-icing, food, industry, chemistry). The name is a member of the XOver since s31. Today it reported disappointing Q3 results, pushing the 5y CDS c25bp wider on the day. SDFGR cut its potash production again by 200k tons and further cuts may come in Jan-20 if producers can’t reach agreement with China. Capex guidance was also cut, it is still possible to see positive FCF this year, although analysts see <€100m. EBITDA came lower than expected due to depreciation and hedging costs. The new full-year 2019 forecasts are for EBITDA of €650m (prev €730m - €830m cons €717.8m), revenues to increase “slightly” this year and adj. FCF to be positive (prev >€100m). Back in October, the falling potash prices highlighted SDFGR exposure to the commodity cycle. The potash is the potassium fertilisers used in agriculture. Now the 5y CDS has widened from 180bp the week after the roll to 300bp now. Weak potash demand has led to production cuts across the industry and SDFGR had to cut their earnings guidance ahead of today’s release, putting the company's deleveraging targets at risk (debt/ebitda <3x by end-20 from ~6x in 17 --ultimate target is to go back to IG by 2023). S&P had cut the rating by one notch to BB- and said SDFGR must show leverage below 5x and FCF >€50m for an upgrade. Moody’s had mentioned a 4x leverage goal needs to be hit for an upgrade from the current Ba2 rating. Liquidity-wise, they have ~€500m cash & cash equivalents on b/s and they got earlier this year a new ~€1B 5y secured bank facility. The previous credit line of €1B due to expire Jul-20 had also been renewed in €0.8B and a €160m 5y bullet loan was granted. Going forward, SDFGR’s strategy is to re-focus on higher-margin goods, so not incl. potash. Weather remains another potential risk, as the German drought had been largely responsible for the subdued 18 earnings, although they invested in new wastewater storage facilities since then.