Boparan – Liquidity flowing and ebbing.
All,
Please find our unchanged analysis here.
Boparan had been very vocal about the cost headwinds it faced. Also, the poor Q4 numbers were no surprise. After quarter-end Ranjit Boparan took away one headache, facilities in Derby and Sunderland that were losing £15m a year in cash have been transferred to direct family ownership. Operationally, since July, the cost pressure has not eased, and Q121 numbers (to be announced in a few weeks) will be weaker. The company has secured price increases from customers to cover higher feed and some (but not all) other production costs, although this positive impact will not be felt until the Q2 numbers (November to January) come out. The company did secure £45m in new liquidity, which will be used to repay RCF drawings of £60m at Q1 quarter-end (vs £25m at year-end). We remain short for 5% of NAV. We are in the process of updating our model.
Fresh liquidity:
- Positive for bondholders is that the £45m of additional liquidity has for the most part come in pari passu with the bonds. After quarter-end, Boparan raised a net £45m of additional liquidity through a £10m TL B and €50m of notes mirroring the SSNs. These were issued at 70c/€, a YTM of 20%.
- We had expected Boparan to use the securitisation basket instead. Issuing bonds at 70c/€ seems expensive. Using the securitisation basket would have made more sense from a cost perspective. We wonder why Boparan choose this path.
- The net proceeds have been used to repay the RCF drawings in a gambit to secure a reduction in the draw stop covenant from £75m to £50m for the next two quarters. Again, we had thought the RCF bank would waive the covenant and allow Boparan to leave the cash on its balance sheet.
Cost pressure going forward:
- Feed Prices: of the £60m headwind in FY21, we expect £20m of headwind across H1, despite the company’s protestations that pass through pricing has recovered all these additional costs.
- Wage Inflation: If Boparan have experienced headwinds from labour shortages of £17.2m, this will have been concentrated in H2 last year. This cost is not going away, there is a pool of labour in the UK, but it is smaller than before. The government will provide seasonal visa relief, but employers will have to pay their workers more. It equates to around 65bp of revenue. We see resistance from the supermarkets in simply covering this cost. The retail industry is suffering the same staff cost inflation across their supply chains. We think this will persist across FY2022. They will be able to recover some of the cost through automation and price rises but we expect a headwind for the full 12-months. We are factoring in a labour shortage headwind of £15m for FY22.
- Load Factor: Man hours would usually run at 300k a week; however, the actual levels are closer to 270k. Again, this will have an impact on volumes which will be partly compensated for in higher prices. Similarly, birds processed have fallen to around 6.0m a week from 6.5m. Management expects this to rise to 6.25m a week. We, therefore, factor another £10m of headwind for FY22
- One-off costs related to current turmoil should also add up to at least a £10m headwind in FY22.
Derby and Sunderland:
- The removal of the losses at Derby/Sunderland (through the plants being taken over by the Boparan family) should add £15m of EBITDA relative to FY21. The Derby and Sunderland processing assets were serially loss-making. The £300k a week of losses will now be borne by the Boparan family directly as they have taken ownership of the assets.
- As the plants probably made a smaller loss in FY20 we are adding £10m of EBITDA to our estimates.
Outlook for 2022:
- Taking into account the various head and tailwinds above relative to FY20 adjusted EBITDA of £135m, we come out at a net headwind of £45m or FY22 EBITDA of £90m.
- This is materially better than the £70m in our model, half of which is thanks to the shift of the Derby and Sunderland plants.
- The other £10m improvement mostly stems from management’s insistence that feed prices have already been passed through at this time, a statement we are not entirely sure about, but that we are inclined to factor in.
Q4 FY21 Results weak in Poultry:
- Poultry EBITDA of £4.4m would have been negative in Q4 apart from one-off gains of £6m (relating to the release of bonus accruals and an R&D credit). Margins fell to below 1% (from 4%). Management says that the additional costs were passed through by the end of Q1 but cost the company £10.6m in Q4. Revenues did rise with the EU business recovering faster. Labour shortages throughout Boparan’s UK supply chain further bedevilled the business in the quarter. There is little that can be done in the short term to fix that problem and Boparan has had to sacrifice volumes in Q1. Automation will help but that takes Capex and Boparan has precious little cash.
- Meals and Bakery has recovered with LFL revenue up 1.1%. EBITDA of £13.5m was in line with last year but was boosted by £2m of one-off gains (related to management bonus accruals).
- Operating cash flow was £24m vs our expectations of £15m. Working capital performance was better than we anticipated at £14m inflow (vs £2m inflow in our model). The underlying performance is better as the £14m figure includes a £6m outflow from deferred PAYE. Capex at Boparan is targeted at 2% of sales (around £50m), it is currently below £40m and will not rise until EBITDA is in line with the £135m run-rate used by management at the time of the refinance in 2020. The £10m spent in Q4 is in line with this, however, we cannot square this with a commitment to greater automation. Boparan doesn’t have the money to make the Capex investment that is necessary.
-The company finished the year with £40.6m of cash in hand, which included a £25m draw on the RCF just before year-end. Between Year-end and the end of Q1, it drew a further £35m. On the call, management suggested that the level of cash on hand was around £40m. A cash burn of £35m would be better than our model which was forecasting £49m of burn. Continued massaging of the various Boparan family relationships may well have reduced the WC outflow of £31m that we were expecting.
Positioning:
- We remain short Boparan for 5% of NAV via the standard 5-year CDS. Despite the new liquidity raised mostly pari passu to the bonds, the transfer of the two loss-making plants to the Boparan family and the chance that pass-throughs have worked more quickly than our model anticipated.
- The mirror notes were issued at 70c/€, which is closer to where we see fair value. The cost headwinds have not yet gone away, although feed costs have stopped rising in recent weeks. Boparan is hoping for the best in negotiations with supermarket clients about further price rises in Q2. In an environment where the labour market is also tight for clients, pushback may start soon. Q1 numbers are out in a couple of weeks, and we expect them to be grim, with management unable to add further gloss.
- We are expecting some pressure from the rating agencies after the Q1 numbers.
- We will review our model before any decision to close our short.
As always happy to discuss any ideas on this with you all
Regards
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055