Avangard 2015 results: in free fall

31 March 2016

Though the company provided a little bit of optimism to its investors, having restructured Eurobonds in October and showing slight growth of profitability in each consecutive quarter of Y2015, general mood remains gloom. Moreover situation is exacerbated by inability and/or unwillingness of parent Ukrlandfarming to fulfill its obligations.

In Y2015 total revenues of the company made USD 230M vs. USD 419.6M in previous year and USD 661.2M in Y2013. Several main reasons according to Avangard report: 1) the companys assets in occupied Crimean and part of Donbass are idle; 2) significant decrease of domestic realization prices nominated in USD (because of UAH devaluation); 3) worsened situation on some of key export markets of MEA. Gross profitability also significantly declined: GPM made close to 10% (vs. 29% in Y2014 and 40% in Y2013). Main reason according to the company UAH devaluation.

We estimate that profitability can be artificially manipulated, as in 9m2015 one of main competitors Ovostar reported GPM at 41%, moreover it increased vs. previous year. Price per egg of Ovostar in Y2015 made UAH 1.37 vs. UAH 1.22 of Avangard. Eggs produced by Ovostar really relate to middle+ segment, so price difference is justified. Main discrepancy is difference in costs, as costs of Ovostar are significantly lower (in Y2013 they were more or less the same). In addition, it can be the case that main part of fodder components is purchased from parent Ukrlandfarming, which is largest Ukrainian farming company.

During last years assets of Avangard were influenced by large impairments starting from write-down of fixed assets and inventories on non-controlled by Ukraine territories assets and finishing with loss of cash in amount of USD 28.2M kept in bankrupted related Ukrainian bank. Due to negative effect of mentioned impairments, write-downs and UAH devaluation, current balance sheet structure of Avangard looks weak, with Equity at USD 235M and Debt at USD 336M.

Future situation in the company will largely depend on general strategy of the owners and their willingness to cooperate with lenders. On negative side here is recent default of Ukrlandfarming on its obligations (it refused to pay coupon under its Eurobond obligations and asked for restructuring), which leads to cross-default of Avangard Eurobonds. Taking into account huge Ukrlandfarming debt burden, current state of Avangard financials, we expect that even if one can expect recovery of both entities, process will be long and painful.

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