Flash Report /

MHP: EU lifts ban on poultry imports from Ukraine – positive for bonds

    Tellimer Research
    17 February 2020
    Published byTellimer Research

    The EU has voted to lift the ban on poultry imports from Ukraine, according to media reports citing the Facebook account of Taras Kachka, Ukraine’s Deputy Minister of Economic Development Trade and Agriculture. Trade restrictions were imposed in January following a case of bird flu in the Vinnytsia region of Ukraine. The details of the decision have not been published yet, according to the same source.

    The news is positive for bonds and we expect stronger sentiment around MHPSA. Following the EU's decision to lift the ban, MHP could resume exports to the EU from some of its three Ukraine-based facilities, but possibly even from Vinnytsia Poultry Complex located in the same administrative region where the bird flu case was reported. MHPSA bonds have already largely recovered after the initial negative price action in January. Despite a positive change in sentiment, we maintain our Hold recommendations on MHPSA 24s, 26s and 29s as new factors of uncertainty have emerged recently: 

    • Potential investments in the KSA. MHP has recently announced that it is at an advanced stage of planning a sizable greenfield project in Saudi Arabia. If approved, the new project could require c30% equity funding from MHP and its partners with the balance funded by long-term low interest rate government loans. These investments have not been quantified yet and are not part of the capex programme guided at US$100mn in 2020. The risk of further expansionary investments, as opposed to deleveraging, is the first thing that comes to mind. We think that current leverage, just shy of the 3x debt incurrence threshold, gives a degree of protection to the bondholders from bold investment decisions.

    • The coronavirus (COVID-19) outbreak could have reduced meat consumption in China, as many restaurants are either temporarily closed on government orders or seeing substantial decrease in traffic because people are reluctant to eat out. According to Bloomberg, domestic retail poultry prices have dropped substantially in 2020 (Figure 2). On the other hand, China reported two outbreaks of bird flu in February and allowed more chicken import into the country. The combined effect of these two trends on poultry prices in different parts of the world is yet to be seen. Having said that, MHP’s export exposure to Asia is very small and events in China are unlikely to have direct implications on the company’s P&L. However, as a big importer (7.5% of world imports, according to USDA), the situation in china may influence supply-demand balance and prices in other markets.

    Figure 1: Ukrainian corporate bonds

    Source: Bloomberg 

    Figure 2: China broiler domestic average spot price, US$/t

     Source: Bloomberg