Fixed Income Analysis /

MHP: Further growth and pressure on margins

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    13 June 2019
    Published by

    We reiterate our Hold recommendations on the MHPSA 20s, 24s and 26s, despite the weak Q1. The company continued to deliver revenue growth backed by new chicken meat capacity and will stay on this track, adding another 100,000 tonnes organically and 80,000 tonnes through its acquisition of Perutnina Ptuj (PPJ). We expect to see higher absolute levels of revenues, EBITDA and operating cash flows, but margins are likely to stagnate unless cost inflation is brought under control or chicken meat price growth accelerates. Despite headwinds, we continue to like the company for running free cash flow positive operations (on a pre-acquisition basis), efficient debt management and little room for big-ticket acquisitions left under leverage covenants. Bond valuation is contained by the already negative spreads to the sovereign and relatively high leverage, which we do not expect to decline materially due to capex, M&A and dividends.

    Chicken meat exports drive revenue. In Q1, MHP increased chicken meat sales by 21% qoq, pushing revenues up 13% qoq to US$436mn. Prices contributed little to this, declining 2.5% qoq. Export sales generated 61% of revenue. Sales outside Ukraine will play an increasingly important role, with the PPJ deal set to add 80,000 tonnes of EU-based production in 2019. On top of that, 100,000 tonnes of chicken meat capacity will be added organically in Ukraine. We estimate MHP’s share of chicken meat sold outside Ukraine could increase to c60% in 2019 from 48% in 2018.

    Margin pressure may ease by year-end. Despite the sales and revenue growth, EBITDA fell 6-7% yoy and qoq to US$83m; the EBITDA margin fell to 19% (Q4 18: 23%). We expect profitability to remain under pressure due to the consolidation of PPJ, UAH appreciation and high inflation in Ukraine. The situation may change if MHP delivers on productivity gains, which could partially offset the 30% increase in labour costs in 2018. Chicken meat price growth trends will not compensate for higher costs. According to management, EBITDA per kilo could fall c15% yoy in 2019. 

    Capex, dividends and M&A come first. MHP has been growing its business, keeping net leverage north of 2x (sometimes near 3x) and debt at c50% of total assets lately. The business was successful because of its high profitability, owing largely to in-house grain and fodder production. MHP is usually free cash flow positive, but does not accumulate cash on the balance sheet. We do not expect this approach to change in 2019, when US$365mn will be required to fund capex (US$145mn), interest (cUS$90mn), working capital (up to US$50mn) and dividends (US$80mn), on top of the US$155mn spent on the acquisition of PPJ. 

    Comfortable liquidity and affordable leverage. MHP’s pro-forma net leverage remained within the 3x net debt/EBITDA threshold, but left little room to increase debt. Counterintuitively, we think it is credit positive because it contains the appetite to pursue expensive debt-funded acquisitions, while high cash flow generation ensures that organic growth and interest payments are fully funded.

    Cost inflation is the main downside risk in 2019, while growth in chicken prices may bring relief from cost pressures.