Boparan – The magicians assistant
All,
Please find our updated analysis here.
Boparan’s Q3 22/23 results were much better than expected, but our model still points to a challenging refinance process. The big question for Boparan’s refinancing is simple: can the company generate EBITDA >£120m whilst covering cash interest with FCF >1.5x? In the meantime, Boparan is generating enough cash to tick along. The company will need to seek the refinancing of its November 2025 SSNs by November 2024. Boparan is performing well in challenging markets. The Poultry business is beginning to see some recovery in volumes, and Meals & Bakery is now recovering inflationary costs. Boparan needs to smooth its relationship with its supermarket customers to generate sufficient EBITDA in FY23/24 and to get another five-year bond away.
Investment Considerations:
- Whilst there is still uncertainty around the ability of Boparan to get a refinancing done, the improving operating environment makes a default in the short term unlikely.
- We would sell 6-month protection if we could, but there is no liquidity. The trade was quoted at 7.7 puf with a 500bp margin.
- We are not ready to plunge into the SSNs yet, but if the next two quarters show stability, we do not rule out Mr Boparan pulling another rabbit from the hat.
- In the next two quarters Boparan has tough comps with inflation recovery quarters rolling off. Most holders are expecting the EBITDA trough in the July-23 quarter, but when these numbers are released, management will need to give investors a very strong steer for stability in the next FY. Otherwise, a par refinancing will become unlikely.
LTM EBITDA shows a refinance remains challenging:
- According to our model refinancing will be £3bn revenue, £121m of EBITDA and net debt of £622m => 5.1x. If we exclude Factoring (£123m) => 4.1x. A stretch but credible.
- However, Boparan will struggle to have FCF/Interest cover much above 1x, even with lower capex.
- Assuming Boparan hits our £121m estimates, we expect some reduction in EBITDA in the following year as supermarkets extract some margin from Boparan.
- Our model is behind management projections, as Boparan expects to deliver cost savings. We are not giving credit yet and accept the company may beat our projections in the next couple of quarters. If so we will hold our hands up. Having promised LTM EBITDA should not drop further, Boparan now needs to deliver or investor scepticism will grow,
The bonds are trading around recovery value:
- SSNs are currently trading at around 67p/£. The downside is 40 points; if restructuring was looking more likely, the bonds would trade to the 20’s first, before recovering towards their intrinsic value. The bonds are currently trading close to that level so there is little upside at this point.
- The next quarter and the management’s confidence in pricing into 2024 will be critical as to how likely investor momentum is likely to be
- July 2024 benevolently projected EBITDA is £121m, a conservative multiple is 4.5x = £545m + Cash £29m = £574m – Factoring £123m – RCF Draw £40m – Fees £30m = £381m. Par value of bonds = £525m => intrinsic value of 73p/£.
- Including an equity share for Ranjit Boparan. SSN holders get a debt instrument for 2.5x leverage =. £303m plus 51% of the equity = £78m*51% = £40m => Recovery = 70p/£
- We assume 2.5x leverage on the New Boparan with the equity 51/49 split in favour of the bondholders. Ranjit may need more to climb aboard a restructuring, which comes from the SSN holders.
Is Boparan going to continue to meet its £75m RCF covenant?
- Yes, it will. Our model has the trough for LTM EBITDA as £96m (next quarter).
- Boparan has also been able to obtain waivers in the past, but none should be needed now.
- The improving cash flow boosted by some working capital release will leave Boparan with cash on hand as it approaches its refinance.
Is a sale of the Meals and Bakery business feasible?
- Feasible but not le-leveraging as 30% of the sales proceeds would leak to the pension deficit. If the multiple paid was well above market, a transaction might be feasible, but we do not think the Boparan Private Office has the resources for such a purchase at such a price.
- We have a trough of £22m next quarter for LTM EBITDA in the Meals and Bakery Business (Adjusted for the Portumna sale). Current LTM EBITDA is £28m, a sale at 5.5x would gross £154m, but £46m (30%, would be allocated to the pension deficit)
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055