Boparan - Same song, different tune
All,
Please find our unchanged analysis here.
Boparan is struggling to pass on non-feed costs and is about to be hit with falling prices. When Ranjit Boparan talks about strain in the supply chain, we listen, even if there is an element of talking his own book, some bad news is coming, and the bonds will suffer. The direct target of his ire may be the government, but the song of costs woe is familiar. The reality for Boparan is that further cooperation from its customers is needed. The avoiding of chicken supply issues for supermarkets remains the argument for cooperation. We are about to see more margin stress, how far this is taken is less clear. The additional £25m of liquidity from the sale of Portumna will be very welcome for Boparan and will afford some leeway.
Investment Considerations.
We are now looking at the Boparan 7.625% SSNs as a potential short. The bonds currently trade at 67.25c/€. The downside is 20 points, whilst we expect the upside from a positive set of numbers to be no more than a few points. The recent fall in feed prices will depress revenue as chicken prices come down, and Ranjit Boparan is highlighting difficulties in recovering non-feed costs.
- If Boparan cannot negotiate pass-throughs for non-feed costs, we see significant difficulties refinancing the SSNs on Oct-25.
- The next set of results are out on 22 June, and we will review our position then. Boparan's eternal EBITDA target of £135m seems a long way away.
What is happening to chicken prices?
- Our analysis shows chicken prices have peaked and are likely to fall in the next two quarters. Feed prices are reflected in chicken prices with a three-month delay.
- In Feb-23, chicken prices were 25% higher than the previous year, a sharp rise from previously when prices were high single digits higher.
- Year on year, poultry meat production in the UK is down 8.7%, reflecting the higher prices being charged. Supermarkets will be keen to lower the price of chicken to recapture volume.
Non-feed cost increases have been harder to recover.
- In its latest investor call, management commented that non-ratchet recovery was still challenging in the Poultry business. If we add in potential price drops driven by lower feed-costs, Boparan will find margins pressured.
- Energy costs: are still hurting Boparan, and Ranjit called for additional government intervention. We cannot see the UK government being able to afford much more.
- Labour: a call for a plentiful supply of labour to dampen wages will not be popular with the government. The issue is more acute for Boparan as it is more labour-intensive than its peers.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055