Fixed Income Analysis /
Ukraine

MHP: Downgrade to Hold on bird flu risk

    Tellimer Research
    22 January 2020
    Published byTellimer Research

    Investor sentiment weakens on bird flu headlines. A bird flu case has been reported in the Vinnytsia region of Ukraine, the location of the largest of MHP’s three poultry facilities. The company has not been directly affected; moreover, MHP’s excellent track record in managing biosecurity risks and its adoption of EU regulations on compartmentation after the last outbreak (in 2017) suggest its facilities are adequately protected. However, some of its trading partners could be concerned by the proximity of the outbreak to MHP’s facilities and impose trade restrictions. In the past, different countries have banned poultry imports from Ukraine and there are some restrictions in place now. Bird flu is a known risk in the industry and MHP has always managed the risk efficiently, keeping its facilities disease-free and its sales portfolio geographically diversified. However, we expect the outbreaks in Ukraine and several other countries in Eastern Europe to weaken investor sentiment. We downgrade the MHPSA 24s and 26s to Hold and reiterate our Hold on the MHPSA 29s.

    What is bird flu and why is it dangerous? A highly pathogenic avian influenza, bird flu is a contagious disease affecting both wild and domestic/farm flocks. It is usually carried by migratory birds. Once an outbreak has been detected, governments implement anti-epizootic measures, which often include slaughtering affected flocks, quarantines and restrictions on trade. A poultry producer therefore could incur direct losses from having to slaughter affected flocks (not usually insured in Ukraine) or from the financial consequences of trade restrictions in domestic and international markets. In Europe this year, bird flu outbreaks have already been reported in Poland, Slovakia, Hungary and Ukraine.

    What does MHP do to mitigate bird flu risks? MHP’s poultry facilities are new – built and operated to meet high biosecurity standards. There have been no cases of bird flu at the company’s facilities. In 2017, after the last bird flu outbreak, Ukraine as a country and MHP adopted EU standards on compartmentation aimed at containing disease outbreaks. This could reduce the risk of bird flu-related trade restrictions, but it does not eliminate them. In 9M 19, 58% of MHP’s revenues came from export operations – the company traded with 74 counties in Africa, Asia, Europe, MENA and North America. In the absence of direct damage to the company’s flock, the geographically diversified nature of its sales could minimise the risk of trade restrictions imposed by individual countries.

    Our fundamental view on MHPSA has not changed. Assuming bird flu spreads no further in Ukraine, triggering a wave of trade restrictions, we expect MHP to have a relatively strong year. 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.