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Expectation Managed

17 May 2019 by jbchevrel

Suedzuecker AG (noted SZUGR) 5y CDS has tightened c30bp over the past month, now back below 150bp. I last commented the name in this blog last March 28, as it performed very poorly following the roll. Indeed, the company had announced a profit warning ahead of its 2018-19 FY results. Back then, the German sugar maker expected revenues €6.75b & EBITDA €350m, mainly because of the sugar segment. And today, SZUGR reported its results in line with its previous warning. Revenues €6.75b EBITDA €353m. The EBITDA is thus down -53% YoY. The earning drop was driven by the sugar segment. Cashflow-wise, FCF -€290m left Net Debt €1.1b (from €0.8b a year before) and leverage 6.7x (from 2.4x). Guidance was little changed also: revenues €6.7-7.0b EBIT €0-€100m. Rating-wise, SZUGR is still IG (Baa3n/BBB-n) with negative outlooks, and a recovery in sugar prices looks like the only way SZUGR doesn’t get downgraded from here. Beyond that, its 6.7x leverage is unlikely to fall below the agencies thresholds until 2020-21, which is when the improvement in sugar prices could have taken effect. That makes management’s commitment to IG rating debatable.