We upgrade MHPSA 24s and 26s to Buy and reiterate Hold on MHPSA 29s – we think MHP will weather 2020’s challenges better than many other Ukraine issuers. New capacity commissioned in 2019 and further additions in Q1 20 will support volumes and help mitigate the effect of soft poultry prices and UAH appreciation. Management’s decision to cut 2020 capex will help preserve cash and deleverage after the capital-intensive 2019. A backloaded debt repayment schedule with no significant debt maturities until 2024, combined with still high cash flow generation, will support the strong liquidity position. MHPSA bonds are indicated at 25-50bps over the sovereign, the widest level in 2019, having traded as tight as 70-155bps inside UKRAIN. We do not necessarily see MHPSA outperforming the sovereign, but expect it to fare better than METINV, DTEKUA and NAFTO, with all three likely to see deteriorating credit fundamentals.
Revenue growth could lose steam in 2020. In 9M 19, MHP’s revenues increased by 33% yoy to US$1.5bn on the back of the 14% yoy organic growth of poultry sales in Ukraine and the acquisition of Perutnina Ptuj (PP) in Slovenia, adding cUS$0.2bn to the consolidated top line. In 2019, the company launched three rearing sites, increasing poultry production by c82,000 tonnes to 540,133 tonnes in 9M 19. Organic growth and acquisitions helped offset 4% yoy weaker average realised poultry prices in 2019. With only one rearing site expected to come on stream in 2020 and stronger UAH hitting profitability, MHP will have to focus on efficiency. Maximising profitability of the product mix and integration of recently acquired PP could help contain the negative effect of weak poultry prices in its export markets on the company’s margins.
EBITDA hit by cost inflation. In 9M 19, EBITDA came to US$357mn – a low-single-digit decline yoy – and the EBITDA margin was 8ppts, down 24% yoy. As we have noted before, inflation has been the main concern for many Ukraine corporates in 2019. In addition, as an exporter (58% of export revenues in 9M 19), MHP is sensitive to changes in UAH exchange rates. The majority of MHP’s costs are denominated in the local currency and paid in Ukraine, making it vulnerable to UAH appreciation (c15% ytd). With CPI and PPI at five-year lows in 2019, we expect cost inflation to moderate substantially in 2020. However, margins could remain under pressure from strengthening UAH, particularly in H1 20.
Weak poultry prices put pressure on top line and profitability. In 9M 19, MHP generated c42% of revenues in Ukraine, the rest split between 74 other countries, with the EU and MENA being the main export destinations. Average poultry prices in the EU were roughly unchanged in 2019 (Figure 1) and the European Commission lowered its estimate of global prices towards year-end. We estimate that, by end-19, a stronger local currency could reduce export prices by 15-25% in UAH terms. With the EU and some MENA markets imposing restrictions on poultry imports, the price environment is likely to remain challenging in early 2020. Combined with strengthening UAH, we expect more pressure on MHP’s margins in 2020.