Boparan - About that Like for Like Pro-Forma Adjusted Run-Rate EBITDA
All,
Please refer to our shelved analysis here.
When we exited Boparan last year, we pointed to rising feed prices likely eating up much of Boparan’s “Like for Like Pro-Forma Adjusted Run-Rate EBITDA” as well as to the manner in which we continue to suspect the owners of managing the profitability of the chicken producer vs. their real estate holdings.
That Q2 slide:
Since then, feed prices have done exactly as advertised and Covid related expenses have added to the pain. However, we felt (and still do) that slide 10 of the Q2 presentation in March was not quite reflective of reality. If we are right, it was last year that Boparan benefited from a drop in Feed prices relative to 2019 and this is the mere catch-up after the refinancing has been achieved. So the right-hand side of the slide has already happened before the refinancing and we are now merely witnessing unidirectional outflows.
Labour intensity and Shortages:
- We had mentioned the risk of labour cost rises post-Brexit, but admittedly hadn’t foreseen outright shortages. Nor had we quantified any such effects. The disruptive shortages should be transitory, but the added cost will have to be passed on.
- A point we had not yet focused on in-depth is the relative underinvestment in automation at Boparan’s UK operations, in particular in the areas of filleting and packaging. For all the good arguments management have around achieving a higher yield through manual filleting, the strategy sits oddly with the number one market position, which naturally incorporates a fair amount of standard product.
- The low automation is a result of past underinvestment and the domino effect of that will be a slightly higher cost rise for Boparan than for more automated competitors. Going forward we need to factor in a higher rate of CapEx than we have observed in the past.
Drop-in demand:
- The pandemic shifted much of the population’s demand from restaurants to supermarkets - Boparan’s primary client base and therefore benefited sales (and costs of course). As the economy reopens and as Boparan are struggling to meet demand with the scarce labour resources they have, management is anticipating that a return of customers to restaurants will help equilibrate the issue. But that is really only code for: “Volumes will drop.”
Cash Flow and positioning:
- Liquidity is strong at £105m. But at £92m EBITDA, the company should be £20m run-rate cash flow negative. Q4 promises to be a disaster, potentially exacerbating the cash burn. Boparan will be far from running out of money, but leverage stats will be unrecognisably higher. Only this time Fox’s biscuits is already sold…
- Ahead of the refinancing the pension plan had been renegotiated to allow for lighter maintenance in the short term, but require a heavier contribution thereafter. As per now, we do not see how Boparan will service any increase.
Positioning:
- We will be dusting off our analysis again.
- The 5y CDS trades 15 points upfront and the bonds - after some gyrations this morning - are back around 93 and could drop a little further tomorrow morning.
- There is no obvious near-term catalyst as Q4 tends to be reported in November and a cash short is expensive. Still, we are not seeing any positive news flow coming from Boparan this year.
- Ultimately we are more concerned for Boparan in the medium term - something any positioning may reflect.
Happy to discuss,
Wolfgang
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E: wfelix@sarria.co.uk
T: +44 203 744 7003