Boparan – The long game.
All,
Please find our unchanged analysis here.
The sale of the bakery business reinforces our bias towards taking a long position in the Boparan SSNs. Our current exposure, through selling 1-year protection matures this month. We are not in a rush to commit before the Q1 results, but assuming there are no additional surprises we will take a position. Prior to the sale announcement, we were already comfortable with the relationship between Boparan and its customers and were expecting greater stability. The additional liquidity from the disposal is welcome and the reduction in leverage will help Boparan continue on track to a leverage level it can sell in a refinance transaction for the Oct 2025 notes.
Positioning:
- We are increasingly comfortable in taking a long position in the bonds when our CDS position expires this month. Whilst we don’t expect any additional unrecovered cost shocks for the poultry division from the supermarkets, additional liquidity is welcome.
- The Q1 22/23 numbers are due on December 14, we expect margins at Bakery will have fallen and Poultry will not have the impact of prior period recoveries. If the cash flow and profitability are in line with our expectations, we will buy the bonds.
Sale of Bakery assets:
- The proposed sale of the bakery business provides additional liquidity and an exit from a non-core business still suffering from the cost recovery issues that bedevilled the poultry business in the past. Significant and unrecovered cost increases will hurt profitability in 2023 and will crimp the multiple achieved but we still expect over £90m in proceeds.
- We expect a multiple of 4.0x on LTM EBITDA => a valuation of GBP120m and net proceeds of GBP90m, with the rest going to help plug the Northern Foods prnsion deficit.
- Our low multiple reflects the significant cost headwinds faced by Bakery; our modelling has EBITDA falling from GBP35m on an LTM basis to GBP20m in the next 12-month period.
- We have assumed that the transaction will complete at the end of the January quarter.
- Boparan has considered the Bakery business non-core for some time so a sale is not a surprise. We assume the completion of any transaction will be at the end of the January quarter.
- Management has already guided that the next few quarters will be difficult for Bakery. Revenue at the division will be negatively impacted this FY as unprofitable business is cut.
Impact on Boparan:
- The remaining poultry business will be a cGBP2.1bn turnover business generating GBP95m - GBP115m, with Capex of GBP30m-GBP35m and interest of GBP44m => FCF/Interest >1.0
- We are now expecting FYE 23 leverage at 5.7x vs 6.1x originally. and our modelling has leverage falling towards 5.5x in the following periods. These levels would be sellable to the high-yield market.
- We had only expected GBP20m in EBITDA from Bakery in 2023, the danger is that supermarkets will continue to resist accepting cost pass-throughs and the underperformance continues. Converting the business to GBP90m of cash now is attractive, even before we add in the removal of a distraction to management.
- The RCF has a minimum covenant of GBP75m. The company will no doubt want a reduction in this covenant, we are sceptical. Boparan has been vocal about resetting the relationship with the supermarkets, this should make EBITDA more predictable. A GBP75m EBITDA covenant on GBP 2.1 bn revenue => 3.6% margins. The lenders will want to ensure management doesn’t backslide on its relationship with the supermarkets. We will be putting the covenant-level question to management.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055