Upfield - Road to refi is getting shorter.
All,
Please find our updated analysis here.
Slowly but surely the Company and its private equity shareholder is extending the maturity of its capital structure to match the time needed to transition the company from a no-growth cash cow under its previous owner - Unilever to a growth-orientated consumer business which is over-indexed to the faster-growing segments of the food sector. The process started with the A&E of a portion of the terms and will end with the refinancing of the existing HY bonds - it got delayed by exogenous factors like a spike in cost inflation and time lag to price increases but the moment has arrived where the stars have finally aligned for that.
Investment Rationale:
- We took our initial 2.5% position in mid-August 2022 post Q2 numbers at 62% increasing our position in December 2022 at 72% to 5% long. With bonds now trading in the low 90’s we are tempted to take some profit. However, there is still upside for the bonds via refinancing of the HY bonds.
- FY2023 guidance of low to mid-single-digit organic top-line growth, high single-digit EBITDA growth and continued deleveraging to be conservative, and ultimately constructive to any potential refinancing.
- The Company has successfully executed an amend & extend of its term loans to 2028. It also raised EUR 400 million to reduce the 2025 maturity balance. The existing senior notes will be the next on the agenda
- We have previously stress tested the cashflow, and demonstrated that despite the reduction in Gross Profit margins to c.20% the business remains cashflow neutral to marginally positive. The Company reversed the Gross Profit decline earlier than we anticipated and is now enjoying mid-30 % Gross Profit margins. The Company is likely to deleverage substantially over the coming years.
- Fundamentally the only tail risk in this situation is the Company having renewed confidence in their deleveraging may likely look favourably on bolt-on acquisitions to improve equity value.
Q3 Results:
- In Q3 2023, gross margins improved to 38.6% (an improvement of 230 bps) due to favourable mix from portfolio actions and EUR 17 million savings achieved in the quarter.
- Organic growth was price-driven (+10.7%) reflecting the annualisation of pricing waves in the first half of the year with volume/mix -5.6% but elasticities were resilient. - Adjusting for portfolio actions, underlying volume/mix declined 2.9%. In addition, volume/mix trends improved sequentially across all regions with Europe (-5.7%), Americas (+2.2%) and AMEA (+8.5%) now in growth.
- In Q3 2023, the Company generated EUR 110 million of free cash flow. Normalised free cash flow was EUR 265 million the year to date 2023 which creates a favourable backdrop for a further extension of the remaining term loans due 2025 and refinancing of the senior notes
Volume Decline:
- We have a glass-half-full view where volume declines while still negative in H1 2023 has turned positive in two out of three reporting regions of the Company (Americas +3%) and (AMEA + 9.2%) in Q3 2023. The Company is at an inflection point where Q4 2023 might be the quarter where all three regions show underlying volume growth and the results of the portfolio actions in the prior periods start shining through
Housekeeping:
- The next catalyst for this name will be the reporting of the FY 2023 financial results (due late March) which may prompt a refinancing of the high yield bonds.
- Given the stability of the credit, we expect the Company will show similar trends in its KPIs (organic growth, margin & free cash flow improvement and improvement in leverage) in its Q4 2023 results
Saahil