MHP estimates 2019 EBITDA is 15% lower yoy

Ukrainian farmer and leading poultry producer MHP (MHPC
LI, MHPSA) has warned its 2019 EBITDA will be “some 15% lower” than its
guidance of USD 450 mln in its trading update released on Jan. 30. The company
attributed such results to weaker grain-growing profits due to the
strengthening of the Ukrainian currency in 4Q19, a drop in export chicken
prices in 4Q19, weaker crop prices, as well as reduced chicken exports in 4Q19
due to a ban imposed by Saudi Arabia. The company’s estimates imply its 2019
EBITDA is 15% lower yoy and its 4Q19 EBITDA is about 70% lower yoy.

The company reported its end-2019 net debt stood at
USD 1,143 mln (or 3.0x of its 2019 EBITDA) and its cash balance was USD 300
mln. Due to weak annual results, the company expects that this year it will pay
less dividends (in 2016-2019, it paid annually USD 80 mln).

MHP reported it produced 728.9 kt of poultry meat in
Ukraine (up 18% yoy) and sold 670.0 kt of meat (up 13% yoy) in 2019. Its export
sales increased 25% yoy to 357.4 kt, which the company characterized as a 5%
underperformance due to Saudi Arabia’s ban imposed in September. Saudi Arabia
has reopened its market for part of MHP’s chicken as of Jan. 29, the company
said.

The average price of MHP’s poultry meat was UAH
38.1/kg in 2019, which was a 4.5% decline yoy. In USD terms, prices rose 0.5%
yoy, if the average annual exchange rate is used, but the company reported that
actual dollar prices fell 6% yoy in 2019.

In 4Q19, MHP produced 188.8 kt of poultry meat (up 18%
yoy) and sold 158.6 kt (up 10% yoy), with export sales increasing 20% yoy. It
reported the average poultry price slid 14% yoy to UAH 34.7/kg in 4Q19. In
dollar terms, the price should have declined by 1% yoy if the average exchange
rate is used, but the company reported a 12% yoy decline.

In 1Q20, the company has taken actions to reduce its
poultry production due to a temporary ban on exports to EU
imposed in January because of the outbreak of bird flu
in some locations in Ukraine. Namely, the company reduced its placement of
chicken by 10%. Such actions and  “challenging macroeconomic conditions”
will negatively affect MHP’s 1Q20 results, the company stated, also expecting
that the EU ban will have a limited effect on the company’s results beyond 1Q.

Alexander Paraschiy: The weak
2019 financial results look disappointing for MHP’s equity, while they should
be neutral for its bonds. Most likely, the EBITDA decline in 4Q19 is mostly the
result of the negative effect of IAS 41 revaluation, meaning that the company’s
cash flow has not been that strongly affected.

The apparent opening of the Saudi Arabian market is
positive, which could offset about a half of the decline of chicken deliveries
to the EU in 1Q20. If the EU export ban won’t be extended beyond 1Q20, the
company has a solid chance to outperform its 2019 results this year. We are
keeping our neutral view on MHPSA Eurobonds.