(Debtwire) Boparan recovery hangs in balance though entry barriers restrict competition – earnings preview

21 June 2023 | 16:57 BST

Boparan is expected by investors to report a sharp year-on-year earnings decline and seasonal working capital outflow in its upcoming 3Q22/23 results for quarter-end April 2023 scheduled for next Tuesday (27 June). But the UK-headquartered poultry producer’s medium-term earnings should benefit from reduced cost inflation and the advantage of automatic price-pass through mechanisms. Barriers to entry also provide comfort despite a recent press report on potential increased frozen-poultry competition, according to two buysiders and an analyst, with a special situations firm concerned on operations.

The company reported 2Q22/23 earnings for quarter-end 28 January 2023 back on 23 March with like-for-like (LFL) adjusted EBITDA increasing 2.6% YoY to GBP 15.6m, as reported. Management previously noted on the earnings call that 3Q22/23 LFL adjusted EBITDA should be up versus 2Q22/23 but the 3Q21/22 comparable period was in a time of strong performance and included one-off benefits as well. CFO Craig Tomkinson noted on the earnings call that “we did see a much stronger exit rate to our 2Q than we saw at the entrance rate, and we’ve seen that continuing as we build on in the early part of 3Q. We are confident that 3Q will be quite a bit stronger than 2Q, but I’m not prepared to narrow it down any further at this stage.”

Click HERE for the 2Q22/23 earnings call transcript.

Boparan’s upcoming prior year comparable period 3Q21/22 LFL adjusted EBITDA was up at GBP 37.9m which means the upcoming LTM earnings result could be significantly down. The two buysiders forecast a modest quarter-on-quarter earnings uptick in 3Q22/23 versus 2Q22/23 earnings of GBP 15.6m before medium-term quarterly results improve further.

“EBITDA will be down YoY that is absolutely clear and obvious. If they do around GBP 20m in 3Q22/23 it will be good but it should be up QoQ,” the first buysider said.

The second buysider noted the company was previously impacted by a large customer switching contracts which impacted margins. He added the expectations are that Boparan will see some improvements over time and results should eventually get better even if the upcoming quarter will be tough.

Any YoY earnings decline in 3Q22/23 means that net leverage may climb in the near-term. Boparan reported 4.8x net leverage at 2Q22/23 and aims to still target net leverage below 5.0x for FY22/23. A further leverage headwind is a potential seasonal working capital outflow given Boparan had a GBP 20.3m working capital outflow at 3Q21/22 according to Debtwire sister serviceCredit Rubric’s estimates.

Liquidity is tight. Boparan had just GBP 37.1m of cash at 2Q22/23 and had drawn GBP 60m of its GBP 80m revolving credit facility (which has an extra GBP 10m accordion facility), according to its 2Q22/23 financial report. Bond prices had previously been under pressure following the publication of a going-concern statement in the 2Q22/23 results that stated that “under the reasonable worst-case scenario, the group may not have enough liquidity during December 2023. Under this scenario, the directors anticipate raising additional liquidity through further short-term funding or further disposal transactions.”

“For working capital to be a trigger for a credit event there needs to be big volatility and they already steered through last year without experiencing anything out the ordinary,” the second buysider said.

The first buysider accepted that working capital will likely be an outflow but the key focus will be the Christmas period and going-concern language. He added that one also needs a view on negotiations with the Pension Trustee but feed costs have come down in recent weeks and Boparan now also have automatic price pass-through mechanisms.

The Boparan and only

Investors remain unperturbed by a 15 June sector press report from The Grocer that noted that Ukrainian poultry company MHP plans to make “significant inroads in the UK’s poultry sector over the next year-and-a-half. The press report added that MHP is “pitching itself as a competitor to Thai and Brazilian frozen chicken for the UK market,” and aims to grow its market share in the UK from its current below 1% level to at least 10% by the end of 2024.

Boparan had noted in its November 2020 bond prospectus that it operates in highly competitive markets that are served by a number of companies that operate on both a national and an international footprint within single or multiple product companies. The bond prospectus added that some of its competitors are large corporations including Moy Park, Avara Foods, Plukon Food Group and MHP for its Poultry segment.

Boparan focuses on fresh poultry supply to its UK customers while frozen poultry is already imported from other regions. Boparan fresh poultry tends to supply supermarkets while frozen poultry is focused more on other end-customers, the two buysiders and the analyst noted.

“Supermarkets want to buy chicken branded as UK chicken and the only imports are typically frozen chicken. Frozen chicken typically goes to frozen stores and the likes of McDonalds and canteens which is not the core Boparan supermarket business so MHP is not a huge threat,” the analyst said.

The analyst argued that if one wants to enter the Boparan market then one has to build a plant, get a supply of chickens, and contract farmers who are already at full capacity serving the existing market, then they also need to displace the likes of Boparan from supermarkets. He added that there are big barriers to entry and that he is not too concerned.

The first buysider agreed and noted the MHP competition will be with Thai and Brazilian competitors. He added that MHP will be going into ready meals and restaurants and not focusing on fresh chicken exports.

“One can’t ship fresh chicken that far and one needs to be relatively close to one’s end markets even if they can ship frozen chicken. Frozen chicken has always been imported and it is fresh chicken supplies that are the key competition,” the first buysider said. “MHP could be better off going after margins that are higher in other countries than the UK. We’ve seen similar reports with food producer Cranswick.”

Boparan currently faces negative cashflow risks. With an LTM 2Q22/23 LFL EBITDA of GBP 114.3m, it has guided for GBP 40m–GBP 50m capex, while it could face rough interest costs of around GBP 45m, minimal cash taxes and GBP 35m of pension payments which would mean negative free cashflow of around GBP 6m–GBP 16m ahead of working capital swings. There remains medium-term earnings upside given it was guided on the November 2020 bond roadshow that there was a pro forma run-rate adjusted EBITDA target of GBP 134.8m.

The company has measures it can take to raise further liquidity as time passes if required, as reported. A sale of the Meals and Bakery segment could be one possibility. Boparan's commercial agreements regarding its joint venture with PD Hook could also be changed to boost liquidity. There also remains renewed speculation that Ranjit Boparan could inject Boparan affiliate company Amber REI into the Boparan restricted group if needed, as reported. Otherwise, Boparan could also try to raise further liquidity in the debt markets, as it did in November 2021, as reported.

Boparan’s Caa1/B-/B- rated GBP 475m 7.625% senior secured 2025s are indicated at 66-mid yielding 27.8% to worst on Markit. Bond prices have been relatively stable since 27 March when they were indicated at 65.5-mid. The Boparan bond prices have remained steady and underperformed the rally in the iTraxx Crossover over the same period. The iTraxx Crossover was indicated at 489bps-mid on 27 March and is now indicated around 87bps tighter at 402bps-mid.

“The bonds have not moved despite Crossover rallying and can move up to the mid-70s but people would rather wait for the quarterly result first,” the first buysider said.

The second buysider countered that the bonds trade in the 60s for a reason even if they are not so liquid. He added that if one is a loan-to-own fund then one may want to play for more than a few points upside and the technicals are currently delicate, while he cautioned that any wrong view can be a big P&L concern.

Independent special situations firm Sarria are cautious on Boparan. While Sarria remain relatively unconcerned on the competitive threats they noted that labour and electricity costs are increasing and that non-food cost inflation is not covered under existing pass-through arrangements. Additionally, the 2025 bond maturity is not so far away.

With the maturity of its bonds in July 2021 previously looming, Boparan’s management team needed all the time available to turn a potential restructuring candidate into a feasible refi situation when it launched a strategic reset. With its previous bonds trading in the low 50s just back in March 2020, a failed refi attempt in July 2020 and transparency concerns, the company had to overcome multiple execution risks to get the refi past the finishing line just eight months before maturity, as reported.

Boparan was 4.74x net levered excluding leases at 2Q22/23 according to Debtwire analyst calculations. Click HERE for the Boparan 1Q22/23 analyst credit report.

Boparan declined to comment.

by Adam Samoon with capital structure by Adeline Bockarie