Boparan - Spot on
All,
Please refer to our unchanged analysis here.
It’s not the margin (Q1 came in very close to model) that is interesting today, but the make-up of it. Sales and Gross Margin are slightly better than we thought - showing Boparan are catching up their feed cost ever so slightly faster than per our model. More importantly however, the cost increases, in particular around labour weigh more heavily than anticipated and will be harder to pass through to clients.
Background:
- Boparan had heavily trailed their Q122 on the FY call a couple of weeks ago and the cost headwinds were as bad as the company had said.
- Management has promised EBITDA and cash flow improvements as price rises begin to cover cost rises fully and we do expect Q122 to have been the low point in terms of EBITDA generation.
Liquidity:
- After the additional liquidity was raised, we expect that the company now has around £15m of cash and access to its £75m RCF (as long as LTM EBITDA stays above £50m).
- RCF drawings now repaid: Working capital outflows were £3m higher than we expected, but that contained a £9m payment to HMRC. We already knew that a further £35m had been drawn under the RCF to cover the £30m working capital outflow. The RCF drawing has been repaid via the additional liquidity raised after the quarter ended.
- At quarter-end Boparan had £60m of RCF drawings with £31m of cash on the balance sheet and only £15m of committed RCF headroom. This was boosted by the £45m of additional liquidity sources post-quarter-end which was used to repay the RCF drawings.
EBITDA disappointing, UK poultry likely to have made losses:
- Despite recovering some of the cost headwinds via price rises, (revenue was £12m ahead of our expectations at £650m), gross profit was in line with model at £73m.
- However, inflation in non-production costs meant that EBITDA was £9m less than the £14m we anticipated. Such costs will be harder to recover from customers. Poultry EBITDA was minimal, with the UK almost certainly generating a negative EBITDA figure.
- We are looking to hear more on those cost inflations.
Positioning:
- The Q1 results bring us to the end of our short thesis. Although we have been playing with the idea to keep it on through Q2, we recognise that the market is unwilling to trade these bonds much lower. Clearly we should have closed out a month ago.
- At present we remain 5% of NAV via the standard 5-year CDS. Depending on further information today, may close out the short following the results.
- Q122 has been a little worse than we expected and Boparan will need to work hard to defend the price rises it has won. But we expect liquidity to be adequate as the company works to recover its profitability, even as Boparan remains vulnerable to further cost increases and any failure to pass these on to customers.
- We will update our model after the call when we have some more clarity on current trading.
Please get in touch to discuss,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055