MHP forecasts 2016 EBITDA at USD 400-420 mln

Viktoriya Kapelyushna, the CFO of Ukraine’s largest poultry producer MHP (MHPSA, MHPC LI), guided 2016 EBITDA of USD 400-420 mln (-8 to -13% yoy) during a March 10 conference call. Operating income from VAT subsidies might be reduced by half from USD 75 mln in 2015 owing to changes to Ukrainian legislation, she said.

MHP sees its CapEx at USD 100-110 mln (vs. USD 170 mln in 2015). The company may invest up to USD 60 mln in working capital during the year (after USD 225 mln last year) to purchase sunflower seeds and soya at low prices this harvest season. MHP targets paying around USD 80 mln in dividends every year going forward, at the level it intends to pay this year, Kapelyushna said.

The company expects its total debt to remain flat in 2016, as almost all its current debt (USD 249 mln, as of December 2015) will be refinanced, she said, while a USD 100 mln undrawn credit line is also available. With regard to debt with longer maturities, MHP would rather approach the credit market in late 2017 or 2018 to refinance its USD 750 mln in Eurobonds (maturing in 2020), if the market allows for it, she said.

Roman Topolyuk: We estimate that even under such conservative management projections for 2016 (the Bloomberg consensus sees EBITDA of USD 444 mln in 2016 currently, down 3% yoy), the company could generate free cash flow of USD 130 mln this year (compared to negative FCF of USD 35 mln in 2015, driven by large incurred investments in working capital).

Such FCF will make significant dividends of USD 80 mln affordable for the company in 2016. Given that MHP generated USD 400 mln in 2016 (at the lower end of managements’ guidance range), its net debt-to-EBITDA ratio would increase to 3.0x from 2.66x as of end-2015. However, that would still be far from the effective net debt-to-EBITDA covenant of around 3.3-3.4x (the company can incur additional debt of up to USD 160 mln, on the top of the covenant of 3.0x).

The current spread of MHP’s 2020 Eurobonds to the sovereign curve of 322 bps adequately reflects the company’s inherent risks, in our view (compared to the average spread of 265 bps). We recommend holding MHPSA notes.

With regards to equity, the current dividend yield of 8.8% seems attractive. We recommend buying the stock to play the dividend payout, which we anticipate might occur by the end of May. MHP has yet to announce the board’s final dividend approval and record dates.