Boparan: Happy grasping nettles
All,
Please find our updated analysis here.
That excel arithmetic would fail to provide the answers for FY22 was very much clear ahead of the results (see our email last week). But even tossing those forecasts into the wind, we were surprised with what vigour Boparan currently shifts its sheer battle mass vis a vis its all-powerful customers. Fortunately (for once) Boparan is a low-margin producer. So an increase in prices of some 7.5% from Q2 should replicate its entire EBITDA (approx £135m). In this inflationary environment that seems entirely doable.
Outlook:
- Strong Q3 coming: Management was very confident that it will meet its £75m LTM EBITDA covenant in Q3. Our modelling shows a 7.5% price increase being part of that equation. Such a rise will be ahead of the rise in costs driven by the Ukrainian conflict. We model EBITDA at around £40m in the quarter. Raising LTM EBITDA above the £75m covenant.
- Q4 Weaker: In the following quarter the higher costs resulting from the conflict will have flown through to cost of sales. Our modelling has EBITDA at around £18m in Q4.
- Beyond: Thinking 100m EBITDA level: Management’s bullishness on reducing the delay and widening the scope of its cost ratchets would place Boparan as a £90m - £100m EBITDA a year business.
-Supermarkets don’t need to be the enemy: Supermarkets could play hardball, but this is an industry issue. Is it worth risking protein supply over a price rise that they will have to negotiate with Boparan 2.0 anyway? Chicken is one of the most efficient protein sources to grow. In a stressed economic environment, it can increase its proportion of the consumer's wallet Is it worth losing 100% of a customer's basket because you haven't got chicken and the other supermarket has?
Q2 Result was in line with our model:
- Poultry Figures reported yesterday were broadly in line with our model, safe for the sales of Derby and Sunderland, which have little bottom-line impact, however.
- We had only a rudimentary forecast of the Meals Division, which proved to be too ambitious. We have re-built the Meals driver, but it is not what’s driving Boparan.
- Liquidity is better. Cash is higher, but that is mostly due to the partially drawn RCF. This line could be fully drawn now. Also, we have been a little bit too restrictive on the payables balance and have raised payables accordingly. The higher than modelled payables do not look like Boparan are stretching their suppliers (~50% themselves), but we’ve had some conservative assumptions that are perhaps not necessary.
- The Q2 financials included a reclassification of some £20m from Cost of Sales to Administrative Expenses. We have enquired about this on the call, but have been asked to follow up separately.
Future Volumes:
- One question on everyone’s mind is what will happen to volumes once prices rise. We think management is right when pointing to Chicken being a staple food and being for the most part non-discretionary.
- Chicken is also one of the most feed-efficient proteins available. It should therefore be less exposed to feed prices than other sources including cattle and pork, i.e. become relatively cheaper and potentially claim more customer wallet than before.
Positioning:
We remain long via what is now the 6-month CDS contract, having sold 5% of NAV worth last year for 10 pufs. It’s been a less comfortable ride than we had imagined, mostly due to the RU/Ukr conflict.
- Before the call we had been debating what to do with the position - if anything and had postponed to after the call (all bad news seemed priced in). That Boparan would not even breach covenants significantly beat our recent expectations. We are therefore holding on to our position.
Looking forward to discussing this with you all
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055