(Debtwire) Boparan deleveraging unlikely as cost inflation and labour shortages pressure poultry margins

24 June 2021 | 17:02 BST

Boparan’s management team were successful in getting their November 2020 refinancing over the line and remain confident rising feed costs can be passed through with increased selling prices. But the UK-headquartered poultry producer’s earnings are way off the marketed pro forma adjusted run-rate EBITDA of GBP 134.8m and labour shortages are an additional headwind, meaning its B3/B- rated GBP 475m 7.625% senior secured 2025s could drift lower, according to two buysiders and a deep-dive analyst, with a third buysider positive.

The company yesterday (23 June) reported 3Q20/21 results for quarter-end 1 May and held its earnings call to discuss them.

Headline 3Q20/21 numbers included an EBITDA fall with management noting that UK poultry margins were down and that labour shortages impacted performance in the quarter. Quarterly reported EBITDA was lower by 30.8% Year-on-Year (YoY) to GBP 22.1m and like-for-like (LFL) EBITDA reduced 16.8% YoY to GBP 23.6m.

The fall in earnings meant that LFL LTM 3Q20/21 EBITDA is now down at GBP 92.2m. This remains a far cry from November 2020 when Boparan marketed its refinancing with a punchy GBP 134.8m pro forma run-rate adjusted EBITDA for the 53 weeks ended 1 August 2020.

Earnings will likely drop again in the upcoming 4Q20/21 quarter, with UK Poultry margins also expected to fall, according to management expectations. Poultry margins for 3Q20/21 were down at just 2.3%, 200bps lower YoY. The fall was driven by rising feed costs, agricultural inefficiencies and having to buy-in meat to service new demand.

Management expect a further rise in feed costs in the 4Q, at a similar level QoQ, though they hope that selling price increases will be faster than the inflation in feed costs.

They also noted that the 4Q performance in the Meals & Bakery segment is stable, but that UK Poultry will face operational disruption due to labour shortages for truck drivers, as well as factory workers. This means that the weakening UK Poultry performance will offset upside in other parts of the business.

Labour shortages have been sparked by both Brexit and COVID, with EU workers in the UK returning to their home countries. The British Poultry Council (BPC) has reported a 10% decrease in throughput due to a shortage of workers across farming and processing, according to a press report.

“The 4Q20/21 period will be a disaster. They have never passed through costs historically. We have concerns as the next quarter will be poor,” one buysider said. “Who knows with the labour shortages. The UK Poultry business is half price and half volume driven and input costs are going up. The outlook is not good.”

A second buysider countered that these results were well addressed by management and it was clear the numbers would be down. “They explained the labour shortages well and the numbers could have been weaker but there were strengths from areas such as Ready Meals.”

Boparan needs earnings to improve to chip away at its net leverage burden. Boparan bases its 4.9x adjusted leverage off a GBP 92.2m 3Q20/21 LFL LTM EBITDA. It could face GBP 40m–GBP 50m capex, GBP 36m interest, GBP 4m cash taxes, GBP 20m pension payments and GBP 10m non-recurring items, which would mean negative free cashflow of GBP 18m-GBP 28m.

Liquidity is reasonable with GBP 26.9m cash and access to a fully undrawn GBP 80m super senior revolving credit facility, meaning total liquidity of GBP 107m. The RCF can also be increased to GBP 90m on an uncommitted basis.

The revolving credit facility has a minimum consolidated EBITDA test of GBP 75m, tested quarterly, meaning headroom could reduce if earnings dip in upcoming quarters.

“Even if EBITDA falls to GBP 90m they are around 5x net levered and the business is worth more than 5x so you are still covered. The bonds need to be weaker for us to be involved but it is interesting paper,” the second buysider said. “Leverage is optically high as EBITDA fell but they will be a big beneficiary from the pandemic environment normalising.”

Leverage will go up as there will be some weak quarters but pressures impact everyone and cost inflation can be passed through, the same buysider continued. “Either they pass through less and gain market share of they pass through more and gain margin.”

The company reported 4.9x adjusted leverage on its 3Q20/21 LFL LTM EBITDA of GBP 92.2m. But adjusted metrics climb towards 6.0x when including a GBP 215m pension deficit and 7.6x including off-balance sheet lease liabilities and factoring and supply chain facilities. This is calculated working off an adjusted LTM EBITDA of GBP 97m that subtracts pension costs, according to Debtwire analyst calculations (see capital structure chart below).

The notes share collateral with the initial GBP 80m RCF, but the GBP 90m credit facilities basket (including the GBP 80m RCF) and certain priority hedging have super priority over the notes with respect to collateral enforcement proceeds, according to a report from Xtract Research, a Debtwire sister service.

The company relies on factoring, with a 1 May factoring position of GBP 72m from customer platforms and a GBP 62m receivables finance factoring.

The B3/B-/B rated GBP 475m 7.625% senior secured 2025s lost around two points since the earnings call to be indicated today (24 June) at 92.875-mid yielding 9.6%, after having initially rallied up over two points to 95.375-mid following the release of the numbers, according to Markit.

The company faces a margin squeeze, not a liquidity crisis, according to the second buysider. “If you buy in the low-90s you get a 9.6% yield to maturity,” he pointed out. “The yield is very good and even if EBITDA only gets back to GBP 110m they can generate free cashflow and delever.”

“This was one of our most successful trades last year and it wasn’t Covid-related – it did well for fundamental reasons. But we did not participate in the new bond as it became clear that feed prices would eat up much of the pro forma adjusted EBITDA this year,” independent special situations firm Sarria said. “The company has good liquidity and the labour shortages may be in part transitory, but EBITDA will fall further.”

Boparan’s previous 2Q20/21 results were already weak, as rising feed costs cut margins. Management were confident rising costs could eventually be passed through increased prices with a three-month time lag, but any further delay meant more operational weakness ahead, as reported.

“Demand is strong but the tight labour market is a huge challenge and feed stock going up has a negative impact on margins,” a third buysider noted.

Boparan declined to comment.

by Adam Samoon and Michal Skypala