MHP
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  • 18 October 2017 - Q2 2017 operating report

Business description

MHP is a leader in the Ukrainian poultry market with around 60% of industrial production (the share of closest competitor is up to 15%) and 40% of domestic consumption with one of the strongest Ukrainian food brands “Nasha Riaba”.

The company is fully vertically integrated. With land bank of 370k ha (MHP belongs to TOP-5 Ukrainian land-owners), farming operations make it fully self-sufficient in corn for fodder production, for sunflower-seeds level of self-sufficiency is at 25-30% (because of natural restrictions on maximum share of sunflower seeds in total sown area).

Fodder is 100% produced by own facilities (4 fodder mills, total capacity is about 1.6M tons), own sunflower seeds crushing allows the company to have additional profits from sunflower oil export (sunflower oil is by-product for MHP, as primarily the company needs sunflower meal for fodder production; it is 3rd largest sunflower seeds crusher in Ukraine).

Till the beginning of conflict in the East of Ukraine, the company has been 100% self-sufficient in hatching eggs, then after closure one of the breeding farm in Donetsk region MHP was forced to import close to 20% of eggs for meat production. Since that time the company has been in process of transformation of one of its broiler farm to breeding facilities, which improved self-sufficiency in hatching eggs and since July’16 it is 100% again.

Current chicken meat production capacities are close to 580k tons. For the last several years the company has been developing its Vinnitsa project, which, after completion will increase total poultry production capacities up to 850k tons. Start of 2nd stage construction - Y2017 (with gradual launch of capacities). Production plan of MHP for coming years looks as follows:

MHP Production

*-excluding Crimean operations in FYs2014-16. MHP disposed of Crimean assets in Q1 2017.

In addition MHP produces over 60k tons of convenience foods and sausages, has own distribution centers and retail outlets all over Ukraine.

MHP opened poultry cutting facility in the Netherlands in Y2016 and another one in Slovakia in March 2017. It is expected that in Y2017 poultry export of the company to EU will make more than 40k tons.

Since May 2008 MHP has been traded on LSE under the ticker symbol MHPC. Current free float - 37%

Operating Figures

H1 2017* H1 2016* 2016* 2015* 2014 2013
Poultry sales, tons 283 972 248 426 534 977 489 816 525 460 447 000
Poultry export, tons 123 042 85 263 189 939 124 604 140 920 122 539
Average price per 1 kg of poultry, USD 1.21 1.08 1.17 1.25 1.68 2.00
Vegetable Oils realization, tons 181 315 178 460 376 390 300 695 296 150 240 100
*-disregarding Crimean assets performance

Sown area distribution and yields for main crops are represented in table below:

Season 2017/2018 2016/2017 2015/2016 2014/2015 2013/2014 2012/2013
Corn
Sown area, ha n.a.123 350126 138126 840129 100116 260
Yield per 1 ha, tons n.a.8.66.89.38.87.6
Wheat
Sown area, ha 52 64058 81353 75243 02042 46038 960
Yield per 1 ha, tons 6.16.56.06.15.45.1
Sunflower seeds
Sown area, ha n.a.67 39957 45149 55038 29030 570
Yield per 1 ha, tons n.a.3.23.13.43.53.0
Rapeseeds
Sown area, ha 29 14020 06922 65310 49518 69012 385
Yield per 1 ha, tons 3.73.43.43.83.23.4
Soybeans
Sown area, ha n.a.40 77135 83125 46016 86013 715
Yield per 1 ha, tons n.a.2.41.62.12.21.8
Total Sown area (UA), ha 360 000355 000340 000290 000287 000250 000

MHP relates to middle+ cost farmers, which means relatively high net cost per 1 ha for farming operations (more extensive fertilizers usage, better than average seeds and other inputs quality). As a result the company demonstrates significantly higher vs. peers yields per 1 ha.

Land bank of MHP is mainly situated in Vinnitsa, Cherkassy, Kiev, Zhitomir and Khmelnitskiy regions. Plans of the company imply increase of land bank up to 550k ha.

Financial information

USD k H1 2017 H1 2016 .. 2016* 2015* 2014 2013
Sales 599 830 483 000 1 135 462 1 061 915 1 379 048 1 496 079
Gross Profit 238 790 220 000 362 106 342 330 500 905 323 726
EBITDA 266 000 243 000 415 000 436 000 555 000 391 000
EBITDA margin, % 44% 50% 36% 41% 40% 26%
Net Profit 190 277 103 000 59 248 -125 726 -412 338 162 240
30.06.17 .. 31.12.16 31.12.15 31.12.14 31.12.13
Total Assets 2 180 631 - 2 075 857 2 075 733 2 293 488 2 768 078
Fixed Assets 1 312 175 - 1 254 429 1 338 812 1 561 669 1 658 912
Current Assets 868 456 - 821 428 736 921 731 819 1 109 166
Inventory 576 249 - 470 935 539 402 496 157 618 262
Cash 129 843 - 154 570 63 468 99 628 172 470
Equity 848 201 - 693 064 672 849 945 522 1 249 205
Debt 1 223 791 - 1 258 091 1 302 668 1 214 840 1 302 246
H1 2017 H1 2016 .. 2016 2015 2014 2013
Net Operating CF 63 787 127 633 349 530 110 145 254 311 331 626
Financing CF -128 545 -92 661 -144 021 15 439 -174 768 -28 138
Dividends paid -77 697 -79 985 -84 289 -49 996 -101 705 -99 801
Net Borrowings -50 848 -3 528 -47 181 66 894 -70 715 71 663
Investing CF 32 424 -47 426 -107 798 -162 807 -127 300 -224 066
*-disregarding Crimean assets which have been accounted as Held For Sale in Y2016 financials and sold in Febraury'17.

Latest financial report of the company

Comments to latest financials:

  • After declining trend during FYs2014-15 (caused by UAH devaluation and general decrease of global commodities prices), during last period of time sales of the company have been recovering.
  • Disregarding results of Crimean assets of the company (these assets have been sold to 3rd party in Febraury’17), in H1 2017 total MHP revenues increased y-o-y by 24% up to USD 600M. Sales and EBITDA breakdowns by type of activity during last years looked as follows:
    USD M H1 2017 H1 2016 2016 2015 2014 2013
    Revenues
    Poultry 382 299 678 644 930 953
    Vegetable Oils 135 139 292 234 247 248
    Farming 28 3 85 117 77 133
    TOTAL 600 483 1 135 1 062 1 379 1 496
    EBITDA
    Poultry&Oils 170 150 270 343 490 358
    Farming 95 90 150 94 97 39
    TOTAL 266 243 415 436 555 391
  • Sales of poultry in natural terms (tons) in Y2016 made 535k tons (disregarding realization by Crimean assets), which has been by 9% higher than in previous year. In H1 2017 y-o-y poultry sales growth made 15% (up to 284k tons).
  • Export made 36% of total poultry sales or 190k tons in Y2016 (+52% y-o-y) and 43% (123k tons) in H1 2017. Export became main driver of general segment’s sales growth during last period of time.
  • In Y2017 MHP intends to increase export supplies of chicken meat up to 220k tons, thereof 34% is to be directed to Middle East countries, 20% - to North Africa, 20% - to EU. The share of MHP in total Ukrainian poultry export in H1 2017 made more than 80%.
  • Due to boosting export (MHP is concentrating on export operations development), domestic poultry sales of the company in natural terms declined in Y2016 by about 5.5% vs. previous year (to 345k tons), in H1 2017 – by another 1.5%. Taking into account dominant positions of the company on domestic market (about 60% of industrial production), we have little concerns regarding MHP ability to take back its domestic market share.
  • After three years of consecutive decline average poultry sales prices of MHP started to recover in Y2017. In H1 2017 average price in USD (USD 1.21/kg) has been by 12% higher y-o-y (in UAH terms growth made 18%).
  • Since Y2012 average MHP chicken price in USD terms decreased by about 45%, main factors – UAH devaluation (in a view of low purchasing power of Ukrainian population MHP could not increase domestic price in UAH in line with devaluation) and general global poultry price decline (by 20-25% during FYs2014-16).
  • MHP does not separate poultry, fodder and oilseeds crush EBITDA, total figure for this combined business direction in Y2016 made USD 270M with 27% margin, in H1 2017 – USD 170M with margin of 33%. Margin remains quite high in comparison vs. international competitors (EBITDA margin of Brazilian BRF in Y2016 declined to 10% vs. 18% a year ago, Russian Cherkizovo – to less than 10% vs. 12-13% in Y2015).
  • In addition, because of increased yields and growth of domestic grains prices due to changes in Ukrainian VAT regime EBITDA of Farming segment in Y2016 reached USD 150M (vs. USD 94M a year ago). In H1 2017 Farming EBITDA amounted to USD 95M, significant part of it – gain from biological assets revaluation (USD 51M).
  • In last season reported EBITDA per 1 ha exceeded USD 400.
  • Total MHP EBITDA in Y2016 made USD 415M vs. USD 436M a year ago (disregarding Crimean operations), main factor of decline – decrease of VAT refund by about USD 40M (due to changes in Ukrainian VAT system). In H1 2017 EBITDA of the company made USD 266M (+9% y-o-y).
  • We note good operating cash flow dynamics in Y2016, when it made USD 349.5M vs. just USD 110M a year ago. Partially it was related to lower fodder stock (decrease by USD 77M vs. 31.12.15), and it allowed the company to improve its cash position as of 31.12.16 up to USD 154.6M (vs. USD 63M a year ago). In H1 2017 net operating cash flow of MHP made USD 64M (main part of changes in assets of the company related to seasonal factors and growth of VAT Receivables, probably related to higher export in Y2017).
  • Part of operating cash flow has been spent on debt repayment (MHP repaid approximately USD 80M of its debt during last 1.5 years), partially it was directed to dividends (about USD 160M during last two years), partially – to new investments.
  • Important to note is also the fact that in February 2017 MHP sold its Crimean assets (poultry production and meat processing capacities) for cash consideration of USD 77.5M (which led to positive cash flow from investment activity in H1 2017, while investments of the company made USD 42M).
  • In Y2017 MHP started construction of Phase 2 (Line 1) of its Vinnitsa complex (along with biogas plant) with the aim to increase total poultry production to about 730k tons (vs. 573k tons in Y2016) till Y2020.
  • As for general balance sheet structure of the company, following UAH devaluation (with debt fully nominated in foreign currency and still large domestic sales share in total revenues) it remains average – debt burden remains rather high with Gross Debt at about USD 1.2bln, Debt/Equity is close to 1.4x, Equity/Fixed Assets – 0.65x). Along with it we note that MHP Net Debt/EBITDA now stands at 2.5x.
  • • Positive for the company is that with recent Eurobond issue (USD 500M with maturity of Y2024) MHP refinanced part of its more short-term obligations (the company repaid bonds with maturity in Y2020 in amount of USD 245M (out of total USD 750M, other lenders refused to redeem the bonds) and practically all of its short-term debt). As a result of mentioned developments liquidity position of MHP improved (Current Ratio now stands at 5.8x), which means that the company now has little concerns over liquidity and can concentrate on its investment program.
As a summary, we note improvement of MHP financial performance during last reporting periods with good poultry export dynamics and average poultry realization price recovery. On positive side is also prolongation of average debt maturity with recent Eurobonds placement, which mitigates relatively high debt burden of the company.
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