Boparan – Breaking the cycle
All,
Please find our new analysis here.
Boparan got its refinancing away in November 2024, pushing its maturities to November 2029. Part of the European Poultry business was disposed of, reducing headline leverage beneath 3.5x. EBITDA has also rebounded faster than we expected. However, we have been here before and sense that Boparan is at a high point in its cycle. Calendar 2025 will bring challenges (from higher labour costs and higher social payments). Management expects the Supermarkets to wear these costs as a passthrough, but we are sceptical given the pricing pressure the supermarket sector is under. The time is not right to put on a short, but we expect profitability to be under pressure by the Quarter Ending April 2025.
Investment Considerations:
- We are sitting on the sidelines for now; the €390m 9.375% 2029 bonds trade near par and are not attractive to us. Boparan got its refinance done in November, and we are waiting for the balloon to deflate. However, there is no catalyst right now so we are not ready to go short.
- The 9.325/29 SSNs trade at 99.5 giving a YTW of 9.7%. The upside is two points, and the downside is three points. If Boparan results disappoint, we expect the SSNs to trade at around 10.5%.
- Our DCF calculation shows £300m of equity below the bonds in our base case. However, our concern remains another dip in profitability post-refinance.
- The company has guided the market towards a slightly weaker Q2 (to the end of January) so the upcoming results will not provide an opportunity.
- The Q3 results will be published on 19th June 25 and we see an opportunity to put on a short then, as we expect there will be pushback on pricing.
Recent Trading:
- Q1 24/25 was weaker as previously guided by management. Top line for the Poultry Division, was up 5.2% (adjusted for EU business disposal). However, there was a fall of 80bps in EBIT margin. One of the reasons for the margin drop was inefficiency in the ratchet system. We suspect some of that will persist over the rest of the year. Meals & Bakery also saw volumes up (9.7%) but margins were lower (50bp). EBIT improvement in H2 will require cooperation from customers. Working Capital movements were -£7m and we expect an outflow in the quarter ended Jan 25. That will reverse in July 25 (Easter is April 20 this year).
Free cash flow generation under our base case, but cost pass-through challenges:
- Our base case assumes EBITDA margins in the Poultry business stay fairly static between now and 2027. However, we are concerned about the ability of Boparan to pass through cost increases over the next two years, and we see a downside to our projections.
- Boparan’s working capital performance has been strong, but we expect some volatility over the rest of the year (partly through the timing of Easter). Customers will also seek to stretch payment terms into 2027 to claw back some of the support given to Boparan recently.
- Deconsolidation of the EU business gives leverage of 3.1x. Headline leverage is 2.7x or 3.0x if you include the factoring and lease debt.
New SSN terms are broadly similar:
- The main difference in the SSNs is the introduction of EBITDA percentages in the baskets. If EBITDA rises the baskets rise. If the basket has been utilised and EBITDA falls there is only a maintenance test.
- The RCF still has a £75m LTM EBITDA test, there is an equity cure available if there is a breach of this covenant. Given EBITDA of around £130m there is little risk of this being triggered at present.
Aengus
T: +44 203 744 7055