17 August 2016
Financial results in last reporting period have been generally better than expected with further development of poultry export operations and good crops perspectives on positive side, but with formal supporting of profitability by more aggressive accounting of gains from biological assets revaluation.
EBITDA margin, %
Total proceeds in 1H 2016 made USD 529.5M, by 4% lower vs. corresponding period of previous year level, reasons of decrease – slump in grains sales (due to small stocks as of beginning of period driven by low yields of late crops in previous season) and continuing decrease of poultry prices in USD terms (average realization price of MHP declined vs. 1H2015 by 7.5%, export price – by 17%).
Poultry realization comprised 63% of total realization (USD 332M). As was reported before , volumes of poultry sales in natural terms grew by 4%, notably export increased by 31% with significant growth of realization on the target – MENA and EU – markets. In reporting period export made 32% of poultry realization in natural terms (in Q2 – record-high 36%, which is quite positive for the company), export operations development remains main priority for MHP management. In Q1 2016 the company entered into joint project regarding poultry processing in Netherlands (to facilitate access to EU market). On the other hand, domestic poultry sales declined by about 6% vs. corresponding period of previous year. Taking into account market positions of MHP we have little concerns regarding ability of the company to take back its domestic market share.
In 1H 2016 sales of vegetable oils significantly increased vs. corresponding period of previous year – by close to 23% in money terms (up to USD 140M) and 18% in natural (tons), following increased volumes of sunflower seeds crushing and launch in 2H 2015 of new soybeans crushing plant. It largely supported reporting period sales in general, taking into account factual absence of grains realization to 3rd parties (USD 2M vs. USD 52M, due to low harvest in Y2015).
As for MHP profitability in reporting period, we should start from year ago, when profitability boosted because of positive (but largely one-time) effect from UAH devaluation. Generally we should clearly divide positive effect for MHP from UAH devaluation into 1) sustainable part (decrease of costs nominated in UAH, when translated to foreign currency, such as salary, for example) and 2) not sustainable – influence of UAH devaluation on total cost of goods sold (in USD terms) only in periods, when devaluation happened. We have seen latter one time effect for all Ukrainian public agri-companies, including MHP, for instance:
EBITDA margin dynamics, %
1H (Q1) 2016
Kernel (financial year finishes on 30 June)
Pace of UAH devaluation slowed down in Y2016, so it was expected that partially situation would revert. It really happened – poultry segment (which includes oil realization) EBITDA margin in 1H 2016 made 29.5% vs. 45% a year ago (situation was exacerbated be decline in poultry prices in USD terms), which negatively influenced general profitability of the company.
Taking all this into account, in a view of drop in grains sales in reporting period, one could expect significant decrease of total EBITDA of the company. In its turn MHP management reacted to this with increase of gains from biological assets revaluation (related to farming segment part of gains made USD 76M vs. just USD 31M in 1H 2015) – the company became much more aggressive with it. On positive side for the company in this respect are high yields of main crops expected for this year. For instance, basing on report, wheat yield made 6.6t/ha (6.0t/ha in previous season), late crops are also mostly in good condition (in previous year we have seen lowest MHP corn yields for last 5 seasons). So, as larger gain from revaluation can be justified by good expected harvest, nevertheless, in this particular case it allowed MHP to be compliant with Eurobonds covenant (Net Debt/EBITDA should be not higher than 3.0x, factual in last reporting period has been at 2.93x), so can not be considered as best practice (though they are quite common for Ukrainian farmers).
Balance Sheet structure
2 241 221
2 075 733
1 451 985
1 338 812
1 310 941
1 302 668
As for general balance sheet structure of the company, following UAH devaluation it remains average (Debt/Equity is close to 1.6x, Equity/Fixed Assets – 0.56x), though main portion of debt is long-term, providing for good liquidity position – Current Ratio is 1.9x, so that in short-term period prospects of MHP are quite good. Principal shareholder has the same view, paying USD 80M of dividends basing on Y2015 results (which we see as more negative factor than positive) despite worsening of balance sheet structure.