Upfield - refinancing ahead?

All,

Please find our updated model here.

With just over 2yrs left until the maturity of the Term Loans, is it time for Upfield to focus its mind on refinancing? We commenced our analysis from this starting point (underlying performance is tracking inline or ahead of our model), but the reality is that with continued deleveraging expected over the next 2yrs, we don’t think the Company will be in any hurry to refinance. Bondholders may want to take advantage and enjoy the 12/13% yields on offer. 

Investment Consideration:

- We maintain our 5% long position in Upfield, having acquired it last year at an average price of 67%. 

- Credit concerns remain the same: Headline leverage remains relatively high at 6.8x, and the relatively small size of the HY bonds (1.4x) versus overall leverage. However, we highlight in our model the continued deleveraging, with the Gross profit margin recovering in all regions. 

- Gross Profit margin for the quarter was 34.4%, in line with FY22/. This remains lower than the recorded 40% and 38% in FY19 and FY20 respectively. The Company has shown growth in both actual Gross profit and GP margins, and our model expects modest improvement over the remainder of FY23. In discussions with the management, we feel our model may be a little conservative. 

- We continue to like the carry in the Senior Notes, with limited downside in our model over the coming quarters. We expect Upfield bonds to continue to tighten, with a 10% yield (90%) our target. 

Elasticity:

- The elasticity numbers Upfield consistently present demonstrate the strong brand and pricing power Upfield enjoys. Globally, they show an elasticity of -0.24, but the implied underlying elasticity is -0.14, after taking into account portfolio decisions on SKUs and other portfolio strategic decisions.

- Regionally, the figures are more revealing. AMEA, which is only 12% of sales, has a positive elasticity, (+10% pricing and +11% volume/mix) as they continue to expand in that region. In the Americas, c.40% of sales, elasticity is -0.21. Europe, which is the most competitive, and also the most fragmented of their regions, showed a -0.42 elasticity. This is reduced to an underlying -0.24 after taking into account SKU reductions etc. 

- Either with or without the adjustments, Upfield enjoys significant pricing power, with minimal volume decline. 

Deleveraging:

- During Q1, the Company repaid €250m equivalent of their Term Loans, reducing both the Sterling and Polish Zloty lines. This was in line with the stated goals of the Company, and with FCF modelled to continue to increase over the coming quarters, we expect further partial pay downs later this year. 

Guidance and Model:

- Upfield management has reaffirmed their FY23 guidance, of mid-single digit top-line growth, EBITDA to grow via higher sales and improving margin, which will result in continued deleveraging. 

- We have modelled a 6% revenue for FY23, but we think both our and the Company's guidance of single-digit growth to be a little light, especially in the context of Q1 sales numbers. We haven’t moved up our model but would expect the Company to easily meet its guidance. 

- Gross profit margin continues to improve, ultimately driving our model to demonstrate leverage below 6.0x by FY24. 

- With commodity prices, especially vegetable oil prices declining to pre-invasion levels, we will see revenue pressures at Upfield in FY24. We expect Upfield to continue to expand its Gross Profit margin over the coming years, but there is the possibility that the margin expansion is not sufficient to compensate for the decline in top line revenue.  

Timing of refinancing:

- We started our analysis by contemplating a refinancing/extension of the Term Loans in the coming months. But importantly, the Company continues on its deleveraging track and given the strong cash flow expected over the next 18 months, we see merit in postponing any refinancing talk until late FY24. 

- The only reason for refinancing in FY23 is if the Company are contemplating an acquisition. There is nothing specific or obvious, but because we don’t see KKR trying to sell the business in the short term, they might try to do an acquisition. In previous discussions with management, they have not ruled out an acquisition, but it has not been mentioned in the last couple of quarters. 

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk