Boparan Foods Limited – Feed, Staff and Context, Positioning
All,
Please find our re-initiation on Boparan Foods Limited (Boparan) here.
- videos with investment discussion available on the website -- In the three quarters since its November-2020 refinancing Boparan’s results have shown headwinds familiar to analysts. Management has blamed high feed prices (with some justification); however, our analysis suggests the 70% cost pass-throughs take longer than the promised single quarter. Also, Covid has exacerbated a labour shortage issue caused by Brexit.
- A press release from the company today (see link below) is quite possibly a warning shot to the RCF banks as well as government. LTM EBITDA may fall beneath £75m by year-end - next week, endangering access to the RCF. We expect the company may have simply drawn it - perhaps today. We further expect LTM EBITDA to drop into the 50s in q122.
- We do not see Boparan fatally hurt. The family is deeply embedded in the supply chain and can significantly buffer a liquidity crunch. However, we expect at least two quarters more of misery and will be taking a 5% NAV short Boparan via CDS with a view to earning 5% in the remainder of the year.
EBITDA pro-forma vs. reality:
- At the time of the 2019 bond deal management used a pro forma adjusted run-rate EBITDA expectation of £134.8m. Our model, which may be a little on the optimistic side after today’s news suggests EBITDA of £78m for the year.
- Whilst this is £57m short of that PF figure, we estimate that the company has suffered over £60m of cost headwinds in feed prices alone. It is further suffering from labour shortages this year, offset to an extent by annualising cost savings following plant closures in 2020. Feed prices are now coming down slowly and the end of the government furlough scheme will relieve some of the labour market shortages. So, some of this will reverse.
- The B- rating of the bonds looks unsustainable to us and could trigger an exodus of disappointed bondholders unable or unwilling to hold lower-rated paper while it deteriorates further.
Positioning:
We are taking a 5% of NAV short position via the standard 5year CDS. We are seeing the business drastically underperform last year for another two quarters at least, primarily due to what we think is in fact a two-quarter lag in feed price pass throughs and due to material labour shortages, this summer. We are expecting LTM EBITDA to approach its £75m covenant level and think today's press articles may mark the moment the company has drawn its RCF ahead of its year-end test in a week’s time. We are further expecting LTM EBITDA to decline into the 50s in Q122.
- The next reporting date is likely November, which is a long four months off for a name trading this wide already, meaning we will lose money if bonds don’t drop below ~ 85p/$. However, Boparan has always been a high Beta name and its increasingly publicised situation, coupled with an unsustainably looking B- rating should make it a good hedge for volatile times.
- The position is sized to lose less than 1% of the book in case an extraordinary event returns the bonds to par. We also concede that the bond is structurally better placed than its predecessors and the market might jump at anything yielding more than 10%.
- It will be worth following British feed prices during this time.
We look forward to exchanging ideas with you on this name.
Regards,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055www.sarria.co.uk