Upgrade MHPSA 26s and 29s to Buy, reiterate Hold on MHPSA 24s. MHPSA bonds made a swift recovery after the March sell-off and, based on Bloomberg indicative prices, once again trade inside the sovereign. MHP remains the strongest corporate issuer in Ukraine that is best positioned to face the challenges of 2020 just as we expected. A combination of solid liquidity, strong cash flow generation, absence of debt repayments until 2024 and a high (c70%) share of hard currency revenues give MHP a head start amid challenges this year, including UAH depreciation, falling commodity prices and Covid-19-related disruptions. Despite the recent outperformance and high uncertainty in the financial markets, we think that positive developments toward new IMF funding for the sovereign, MHP’s solid stand-alone credit profile and relatively low bond prices still offer a good entry point. We upgrade MHPSA 26s and MHPSA 29s and reiterate Hold on MHPSA 24s.
FY 19 results expectedly mixed. MHPSA reported a 32% yoy increase in revenues to US$2.1bn driven mainly by the acquisition of Slovenian producer Perutnina Ptuj (PP), and a 13% yoy increase in poultry sales generated by the company’s Ukrainian facilities. Weak poultry prices in export markets, the consolidation of less profitable European operations and UAH appreciation put pressure on profitability and reduced EBITDA by c16% yoy to US$376mn on a pre-IFRS 16 basis. The accounting standard introducing changes in the treatment of leases significantly increased both EBITDA and debt. MHP continues to disclose EBITDA before the impact of IRFS 16, which is used to calculate net leverage under bond covenants. Despite lower profitability (EBITDA margin down 11pts to 18%), MHP generated strong operating cash flows further supported by sizable but temporary release of working capital (Table 1 in full report).
High leverage mitigated by strong liquidity and cash generation. In FY 19, MHP’s net leverage crossed the 3.0x threshold prescribed by the bond covenants, triggering a restriction to put on more debt and limiting dividend payments. MHP’s total debt increased to US$1.7bn, including US$200mn lease liabilities under IFRS 16, which are excluded from net leverage calculation for the covenant purposes. The rest is manly represented by US$ denominated bonds (US$1.4bn) due 2024, 2026 and 2029. The company has effectively no debt maturities in the next three years. Based on the fixed interest rate and the amount outstanding, we estimate annual interest payments at cUS$100mn in 2020-2023. MHP ended the year with US$341mn of cash on its accounts and generated US$380mn free cash flow before M&A and dividend.
Positive outlook for 2020. Despite a slow start to the year when export sales were affected by an avian influenza outbreak and the uncertainty brought about now by Covid-19, management expects EBITDA to increase 5-10%yoy to US$400-420mn (pre-IRFS 16). These projections are based on the assumptions of single digit growth in production and flat prices in US$-terms. On the conference call, the company confirmed 2020 capex guidance at US$100mn and outlined certain cash outflows expected during the year, including a US$100mn investment into the working capital to replenish grain inventories and dividend of cUS$30mn. Based on management guidance we estimate MHP’s FCF at cUS$70-100mn and net leverage at 2.6x-2.7x at the end of 2020. UAH depreciation is expected to support profitability in 2020 – according to the company’s estimate, UAH1 depreciation generates US$8-10mn of EBITDA on an annualised basis. We estimate that MHP generates c71% of revenue in hard currency, while c70% of costs are UAH-denominated.
Covid-19 response. The pandemic has not had a material (direct) effect on the company’s operations. However, preparations are being made and contingency plans put in place to address potential risks. On the operating level, the company introduced remote working, additional medical screenings and protective masks. To ensure security of supplies, MHP accumulated 2-3 months worth of inventory covering Q2 20 requirements. According to management, overall demand has not been affected, however, redistribution between different groups of customers and selling channels is taking place both in Ukraine and the export markets. Should Covid-19 cause serious disruptions, the company may see increased liquidity requirements.
Potential land acquisition expenses delayed at least until 2024. The long-awaited legislative action finally happened with the Ukrainian parliament lifting a ban on farmland sale. The market, however, will be subject to many restrictions effectively banning corporate ownership of agricultural land until 2024, and leaving the question of foreign ownership (including companies with foreign shareholders like MHP) to be decided at a referendum. With MHP cultivating 360,000 hectares of leased land, a potential land acquisition bill could have been significant. However, the company is very unlikely to incur farmland acquisition costs until 2024.