Will management survive liquidity crisis?

Q2 2024 results

04 September 2024

  • The troubled battery maker has had a rough period over the last couple of years and H1 2024 seems to be deepening the worries. Their main problems seem to be in 2 major and crucial groups – A) growing their sales and B) coping with the increased indebtedness towards both bondholders and banks.
  • Sales dropped 8.2% YoY to BGN 178mln. The financial statements do not have an explanation why the drop took place. We can see that sales growth has been mediocre for the last years – 3.8% in 2023 and 0.6% in 2022. Such stale performance means that the management likely does not have a clear business development strategy or it is not putting the necessary effort and investment in expanding their sales networks. In the context of the period (i.e. during the conflict in Ukraine) it could be assumed that maybe Ukraine had an impact, but they classify this as a minor disturbance.
  • We can see that the geographic markets are very diversified. The company has major presence in over 20 markets across the world, which are different by nature, mentality, ways of approaching sales and required certifications. It is understood that perhaps there must be different strategies for each market or at least each group (e.g. Eastern Europe, Western Europe, Africa, etc.) and proven experts in those markets should be hired. For this specific period (H1 2024 vs H1 2023), 8 countries marked a double-digit percentage decline of sales.
  • Decreased sales were offset by the greater decrease in cost of the materials, which dropped by 21% to BGN 128.7mln. This was the major driver for the growth in Operating profit of 12.5% to BGN 7.5mln and the growing EBITDA by 10.2% to BGN 20.1mln. The EBITDA margin grew by nearly 2% to reach 11.2%.
  • Net Income marked a 67% decline to BGN 1.6mln due to the increased financial expenses associated with the larger long-term debt and possibly the penalty interest associated with some of the delayed debt payments. The lack of profit from discontinued operations (as recorded in Q2 2024) also influenced the net result.
  • Bond issue (ISIN: BG2100023170) liquidity hurdles – the company had a problem meeting the principal payment requirement in Q1 2024 in the amount of EUR 8.4mln (BGN 16.4mln) and after a call by one of the major bond holders for a general meeting of the bond holders to declare the issue as non-performing, the payment was done in full with a delay on 05.04.2024. The largest portion – 50% of the principal, or EUR 14mln (BGN 27.4), will be due at the beginning of Q1 2025 and it poses credible questions about the availability of funds considering the presence of the other bank and leasing debt.
  • The elephant in the room is Monbat’s bank debt. It has over 38 bank loan facilities from 10 banks. When we started the analysis before the release of Q2 consolidated results we relied on the information in Q1 and it was clear that the outstanding debt that would have matured by the end of Q2 was for over BGN 38mln. The loans maturing in Q3 would amount to over BGN 48mln. In the same time, there was less than BGN 10mln cash available. We spoke with the Investor Relations Director about their plan to meet bond and loan payments and we were assured that there were no liquidity problems and the Q2 consolidated report would include information on repayment strategy.
  • Too big to fail? The exposures to some of the banks are big and failure would get the banks into a territory they don’t want to get in – lower quality assets (NPLs) for their reporting, court proceedings, bad publicity, etc. Instead, banks could push for partial repayment to decrease exposure and negotiate a repayment plan with extended maturity date, while in the meantime collecting penalty fees and interest on the outstanding debt.
    • United Bulgarian Bank – their main banking partner with the largest exposure of BGN 50.5mln in Q1 and BGN 49.9mln in Q2. They have negotiated their total exposure and repaid 2 smaller facilities, but the increased exposure through maxing the remaining limits and possibly incurring penalty fees nearly offset the drop. While in the past the limits had different maturity dates, the current new maturity date for most limits is 31.07.2027. This means that the facilities, which would mature in 2024 were rolled to Q3 2025 and those after that were pulled back to it, indicating the worries by the bank management that they would be able to collect their loans.
    • Eurobank – their second largest exposure of BGN 29mln in Q1 and BGN 20mln in Q2. They decreased their exposure by having about a third of it (2 loans) repaid and rolled the maturity date by 3 months.
    • DSK Bank – remains unchanged, exposure at BGN 13.9mln.
    • Investbank – remains unchanged, exposure at BGN 19.6mln.
    • Raiffeisen Romania – BGN 3.7mln out of BGN 7.7mln repaid.
    • STB (Tunisia) – exposure dropped from BGN 17.6mln to BGN 15mln.
    • Fibank – a new loan for EUR 10mln (BGN 19.6mln), fully utilized.
  • Maturities calendar and exposures:
    • Q3 2024 – BGN 20.2mln – the entire DSK Bank exposure of BGN 13.9mln (consisting of 2 loans of BGN 4.9mln and BGN 9mln) and part of the Tunisian STB for BGN 6.3mln.
    • Q4 2024 – 28.9mln – Eurobank’s remaining 2 facilities for BGN 20mln, Raiffeisen Romania for BGN 4mln and Raiffeisen Serbia for BGN 3.9mln.
    • Q1 2025 – BGN 46.9mln – Investbank’s 2 facilities for BGN 19.6mln and the bond issues principal for BGN 27.4mln. Additional interest to the bond payment will be applied as well.
    • Q2 2025 – BGN 0.2mln by STB (Tunisia)
    • Q3 2025 – BGN 31.3mln – United Bulgarian Bank’s BGN 31.1mln rolled exposure discussed earlier plus BGN 0.2mlb by STB (Tunisia)
  • The new loan by Fibank AD for EUR 10mln (BGN 19.6mln) provided the lifeline liquidity they needed. Aside from that, another BGN 3.9mln was raised by maxing available credit lines. After BGN 13.6mln loan repayments and BGN 0.94mln leasing servicing, a theoretical BGN 8.9mln amount is left. The growth in the Cash account from Q1 to Q2 of BGN 7.6 is a close approximation of the effect (BGN 9.8mln to BGN 17.5mln).
  • We do not know the terms and conditions of the loan between Fibank and Monbat but we can guess that it is likely a balloon payment at maturity and interest servicing throughout the life of the loan. The bank does not specify exact interest rate agreements, but if we assume that the range is between 4% and 7% annually (based on previous increases of exposures assumed to not be serviced), then between BGN 0.784mln and 1.372mln will have to be put aside to service this line alone. Considering Fibank is known to declare assets (loan collateral) callable fairly early after non-performance, then Monbat could possibly face a litigation process where it has to part with the land, offices, a wine producer (associated company) and BGN 3.9mln blocked cash given as collateral.
  • Currently, the available cash in “Cash and cash equivalents”, which is not blocked and can be used is BGN 12mln (out of BGN 17.5mln). Considering the maturities calendar described above, we assume that the payment with the highest priority would be the principal payment of the bond issue in Q1 2025 for BGN 27.8mln. It is possible that the existing cash plus the EBITDA in the next 2 quarters will be able to cover this, but it is unlikely that they will be able to repay the loans for DSK Bank (BGN 20.2mln) in Q3, Eurobank (BGN 20mln) in Q4, Investbank (BGN 19.6mln) in Q1, Raiffeisen Romania (BGN 4mln) in Q4, Raiffeisen Serbia (BGN 3.9mln) in Q4 and STB (BGN 6.3mln) in Q3. Most likely the management will try to roll the DSK debt. The Eurobank exposure can turn to be problematic and if they required partial repayment for the renegotiation done in Q2, it is likely that they require additional reduction in the debt to agree for a further maturity date extension. The Tunisian STB has provided them with at least 10 facilities and it is possible that they agree for an extension, because they allowed withdrawals in Q2, i.e. they did not see anything wrong with their performance. Raiffeisen Serbia had already provided them with an extension of 240 days and might be ready to provide them with an extension together with Raiffeisen Romania (major decisions for both done in HQ in Vienna) especially if the rumors for a possible sell of Eastern European branches of the bank turn out to be true – this way their asset portfolio will keep its value. Investbank’s exposure is hard to predict, as the bank has similar traits to Fibank with regards to behavior associated with collateral acquisition, but it is also possible that they agree to an extension subject to repayment of penalties, which would help their income statement, which would be beneficial after their acquisition of Tokuda Bank.
  • Receivables from related parties – BGN 58.6mln. It is likely that practically nothing of this account can be used to repay debt. 67.7% of that account (BGN 39.7mln) is receivables from Prista Oil Holding EAD, Monbat’s main shareholder with 42.73% of the shares. We do not have Prista Oil Holding EAD 2023 financial statements, but if they are similar to the 2022 financial statements, which are public, we can conclude that the majority of the cash (BGN 7.1mln out of BGN 9.5mln) is blocked servicing LGs for suppliers.
  • The ability of the management in the next quarters to negotiate with their banking partners will play a vital role in avoiding defaults on payments. In the same time, a greater effort in sales must be made to reap the potential of the diversified markets portfolio, which they have but hardly use. Share NAV value shows that the company is undervalued, but it is possible that investors take into account the financial risks of the very high leverage that they have, which is shown by the steady decline over the last 12 months. One thing is sure – radical reforms in their financial management and the sales organization are needed.

Ivaylo Valchev
Equity Analyst
Tel.: +359 2 937 9862
e-mail: valchev@sis.bg

Svetozar Abrashev
Senior Managing Partner
Tel.: +359 2 937 9869
e-mail: abrashev@sis.bg

Sofia International Securities
Sofia 1000,
140 G. S. Rakovski Str.
Tel.: + 359 2 937 98 65
e-mail: info@sis.bg

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