Boparan – Sometimes when it rains, it pours
All,
Please find our updated model here.
❗️Note - If you are already logged in to our website’s Boparan page please reload the page to make sure the files upload to the latest version❗️We are making some minor alterations to our model by adjusting the assumptions around working capital. Our central thesis is unchanged, Boparan faces tough trading conditions over the next 2 quarters at least, but the issues should ultimately not be fatal. We expect the company will have drawn its RCF before its July year-end and our model still predicts that the company has some cash headroom at the low point which is in Q1 FY2023. Additionally, the involvement of the Boparan family in the supply chain could see some liquidity relief via stretched payables if there was a liquidity issue but there is no guarantee that that would happen. The chicken welfare news today is a distraction that will no doubt occupy some management time, however, we are not overly perturbed.
Liquidity and Working Capital:
- Boparan will continue to receive working capital inflows in the July quarter (FY Q4) with Q1 being negative and we expect a modest inflow from growing negative working capital over the next 2 years as volumes return.
- Arithmetically, liquidity could become tight, albeit remain just sufficient. However, should it come this far, we would expect a reaction from the Boparan family, stretching payables to ease the liquidity concerns.
- Our thesis, therefore, remains unchanged. The situation is set to become worse before it becomes better.
- With EBITDA only recovering slowly, the cash flow low point is in Q1 2023, and we expect liquidity to drop to £30m by then.
Welfare pressure:
- The next protein scandal is never far away and Boparan is frequently the (deserved) target of newspaper reports. Just yesterday, a charity made allegations about the welfare of chickens in plants owned by Hook 2 Sisters, Avara and Moy Park (see link).
- We are not overly concerned here, but suppliers are under constant pressure over animal welfare. Customers are sensitive to allegations of mistreatment and consumers are increasingly vocal.
- It is possible that some remedial spending may be needed around the sheds to pass the next inspection, however, it is likely to be small.
Positioning:
- We have taken a 5% of NAV short position via the standard 5year CDS. We are seeing the business drastically underperform last year for another two quarters at least, primarily due to what we think is in fact a two-quarter lag in feed price pass-throughs and due to material labour shortages, this summer. We are expecting LTM EBITDA to approach its £75m covenant level and think today's press articles may mark the moment the company has drawn its RCF ahead of its year-end test in a week’s time. We are further expecting LTM EBITDA to decline into the 50s in Q122.
- The next reporting date is likely November, which is a long three months off for a name trading this wide already, meaning we will lose money if bonds don’t drop below ~ 85p/$. However, Boparan has always been a high Beta name, and its increasingly publicised situation, coupled with an unsustainably looking B- rating should make it a good hedge for volatile times.
- The position is sized to lose less than 1% of the book in case an extraordinary event returns the bonds to par. We also concede that the bond is structurally better placed than its predecessors and the market might jump at anything yielding more than 10%.
- It will be worth following British feed prices during this time.
We look forward to exchanging ideas with you on this name.
Aengus
'Severely disabled' chickens filmed at supermarket supplier farms - Supply Management (cips.org)
E: amcmahon@sarria.co.uk
T: +44 203 744 7055