Boparan – sailing into the wind
All,
Please find our updated analysis here.
Boparan continues to recover feed inflation both current and past. This latter phasing has meant that delays in the recovery of higher energy and fuel costs have not prevented the improvement in margins. Supermarkets remain supportive but are not passive with Boparan losing one retailer and winning another. Bakery is suffering and is likely to see volumes fall as supermarkets are nort absorbing the cost increases as they are doing in poultry. We now need to decide if the wind in Boparan’s sails will continue to support EBITDA and what to do with the bonds as our December CDS is expiring.
Poultry inflation ratchets are working, but other challenges are out there:
- We had spent a long time modelling Poultry margins and even though we had opted for a more conservative approach, the delayed pass-through effect makes a lot of sense.
- EBITDA margins are recovering as higher prices are paid by supermarket customers, there are still negotiations ongoing on energy and fuel costs. Q1 EBITDA (to end October) is guided at £15 -£20m (our model was predicting £19m).
- Underlying EBITDA margins for poultry in Q4 rose to 4.5%, which would see EBITDA above £120m if applied to our FY revenue projections. We expect margins a little lower.
- Boparan is still negotiating more dynamic recovery of other costs (energy/fuel and labour), the impact of these cost recovery efforts is expected to flow through in Q2/Q3. For now, the recovery of previous cost increases has compensated for this.
- Q1 is expected to be weak due to problems in the hot summer (bird mortality/weight). We have cut our Q1 poultry EBITDA expectations to reflect this. However, we still expect continued improvement from Q2-Q4.
Bakery business suffering:
- Bakery is not as important to supermarkets so there has been much less by way of recovery and this is being reflected in poor results.
- EBITDA margins fell from 360bp due to delays in recovering inflation.
- Higher costs are crimping volumes and this is not expected to get better - in the next quarter at least.
The recovery from Q3 continued into Q4:
- Higher EBITDA than we had modelled flowed through to OCF which was £13m ahead of our model. Boparan also repaid £25m of its RCF which consumed the additional cash flow. We have tweaked our modelled up from £106m to £115m to reflect the improving margins in poultry.
- Revenue rose on cost recovery as opposed to volumes. As a result of the economic slowdown, poultry is beginning to benefit from a shift from beef to lower-cost protein, but this volume impact is still marginal.
- EBITDA was £43m vs our model of £23m, primarily due to poultry pass-throughs coming in with delay.
Investment Rationale
- Q4 was significantly better than we modelled and the RCF covenant was easily met. We are long 5% of NAV via the Dec 22 CDS since last year, before the Ukraine war began and the October test is the last before our position expires. We will be thinking about a position in the bonds next.
- Headwinds remain in recovering fuel and power costs but this has been bridged by the recovery of previous costs.
- If the relationship with the supermarkets remains supportive Boparan will be largely shielded from input cost inflation
- Avian flu remains a tail risk. Cases are rising and even where a farm is not hit with infection, additional handling and transportation costs will impact margins.
- We have tweaked our model to reflect greater confidence that cost pass-throughs will continue to be made quickly and more fully and will reflect in a stronger FY23.
- We expect 2022/23 to see some volume attrition however we are growing more confident that the relationship with the supermarkets is now healthier. Once we have a better view of the volume impacts, and the additional costs in Q1 we will review whether we are comfortable with a long position in the bonds when our current position expires.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055
www.sarria.co.uk