Boparan – Free Money.
All,
Please refer to our updated analysis here.
A few weeks ago, our short was deeper in the money than it was yesterday, but we’ve made good P&L anyhow. So to assess how far we’ve come towards the bottoming out of Boparan’s performance, we have scrubbed the numbers a little further, in particular Boparan’s SG&A and working capital.
The thesis behind our short has played out and yesterday’s muted reaction to further negative figures suggests the market is ready to look through this phase, or perhaps is just too keen on earning a little yield. Either way, it is time therefore to exit our current position and look further forward.
Sufficient Liquidity:
- In our previous model already we anticipated that the RCF was going to be sufficient to cover the liquidity challenges the company is facing. Having lowered our working capital outflow expectations for 2022, we are comfortable that Boparan has sufficient liquidity on a 12-month horizon.
Better H222:
- Broadly, we see performance sideways for another quarter before picking up.
- We expect revenue of £2.7bn (+4%). The rise will be driven initially by pricing, but we expect volumes to improve in H2 as the labour pool for Boparan grows.
- On current projections, LTM EBITDA will bottom out in Q2 at £57m before rising to £91m for the FY22. We have softened our view on working capital outflows and expect £31m for the year.
- Free cash flow will be marginally negative as Boparan needs to spend Capex on automation to manage its labour costs. We expect RCF drawings during the quarters but at quarter-end dates would see this at less than £10m.
- There are still challenges. Labour shortages and higher costs could worsen if we see a “pingdemic”, although this would be an industry rather than Boparan issue. Some of these costs would be recovered via inflation ratchet agreements. Feed prices have stabilised over the last month or so. They could rise again, forcing Boparan to go back to its customers, again this is an industry issue.
Avian flu:
- Low probability but high impact risk.
- Avian flu has garnered a few headlines lately with outbreaks in the UK and EU at the highest levels recorded. However, the lessons of the foot and mouth crisis have led to more effective prophylactic responses. On the Q1 call management mentioned that all birds are kept indoors, this has proved effective in managing the spread of Avian flu from wild birds to commercial poultry farms.
Positioning:
- Boparan secured £45m of fresh liquidity after Q1 ended. Boparan’s liquidity position, particularly in the next 18-months is now more than adequate.
- We have replaced our 5% of NAV short via 5-year CDS, booking 27 pufs with a 5% NAV long selling 1-year CSD for 10 pufs. We have had a 10-point gain in the short and expect the new position to return 16% to December 2022.
- Our thesis had originally been that Q2 would be the low point, but following the raised liquidity, sold plants and various other measures we think Q2 won’t perhaps be too different from Q1 from a relative operating point of view. We are therefore choosing the earlier end of the initially estimated time horizon to make the switch.
- Naturally, the downside comes from dramatic worsening of situation, requiring an event before Dec 22.
As always happy to exchange ideas with you all.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055