Boparan - What is in the hat?
All,
Please find our updated analysis here.
Boparan FYE23 numbers showed a significant improvement as the company moved into a crucial 12-month period. In November 2024, Boparan will seek to refinance its 2025 SSNs using the FYE July 24 results. In the past, Boparan has performed strongly when a refinance is looming, with results fading after the deal is completed. The relationship with the supermarket clients is now more supportive, which should reduce the volatility in profitability. Nobody wants potential disruption to 1/3rd of the poultry supply in the UK. Boparan’s problems are about the low margins rather than a debt-bloated balance sheet.
Investment Considerations:
- We are not ready to plunge into the SSNs yet, but if the next two quarters show stability, we do not rule out Mr Boparan pulling another rabbit from the hat.
- The upside of a long position is 33 points of capital and 7.5 points of coupon giving a 12-month return of 60%. The downside is 20 points, as we expect the Boparan family would need 25% of the equity to be incentivised to stay in the structure. At 25% of the equity to the Boparan family => a recovery of around 48c for bondholders.
Refinance is around the corner:
- Boparan will need to refinance its SSNs by the end of 2024, using FYE24 results, and a projected adjusted EBITDA. They adopted the same process in the previous refinance.
- There is no guarantee of success given the current leverage of well over >5x. However, leverage is coming down and with a mixture of outperformance vs our model and additional potential EBITDA uplifts Boparan could have a credible proposal
- Maximum leverage of 4x will be required to sell a deal to investors. Our model has 5.1x leverage in July 2024 (falling to 4.5x) by July 2025. Boparan needs to outperform our model this year (EBITDA of closer to £130m than £110m). However, the company is a past master at pulling a rabbit out of the hat when a refinance is imminent.
- Interest coverage will be weak but passable: With the new coupon likely to be near 10%, FCF/Interest coverage in 2024/2025 will be around 1.5x.
Performance improvement needs to accelerate:
- Profitability in the Poultry business has been restored following cost passthrough agreements with supermarkets. FYE23 EBITDA was £70m, and next year will be closer to £75m.
- Meals and Bakery is finally gaining traction on passing through inflationary cost rises. However, it is not as crucial to client supply chains as poultry. EBITDA was around £30m, and we expect £33m in 2024.
- The suppliers don't want disruption, and mid-single-digit EBITDA margins do not point to excessive profitability.
- The next set of results will be 24Q1 due around 15th December. We want to see the Q4 trends continued into FYE24 (higher EBITDA in Poultry and Meals and Bakery. More evidence that our projections can be beaten in the year supporting a refinance. We will look to take a position then.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055