Zelensky states MHP does not need state support, suggests inspection

Ukraine’s leading poultry producer MHP (MHPC LI,
MHPSA) does not need state support as it “receives super profit and annually
pays huge dividends”, President Volodymyr Zelenskiy told the National
Anti-Corruption Council on July 18, Interfax-Ukraine reported the same day.
Zelensky said that MHP received nearly UAH 2.5 bln of state support in 2017-2018.
He also suggested the law enforcement bodies to compare the amount of state
support granted by MHP and the amount of dividends it paid. “Maybe we will get
the same figures,” he assumed.

According to MHP’s financial reports, the company
received USD 52.6 mln in government grants in 2017 and USD 1.0 mln in 2018
(recognized as income). On top of that, the company received USD 34.8 mln in
state support in 2018 (zero in 2017) as a part of a compensation program for
livestock farms construction (not reported in P&L). In each of the years
2017-2018, the company paid USD 80 mln in dividends to its shareholders.

Its total amount of grants received in 2006-2018
amounts to USD  947 mln, we calculate. In 2006-2016, most of the state
support was VAT benefits, while since 2017 the government changed the state
support mechanism from tax benefits to state subsidies (which were allocated in
2017, but not 2018) and support of investment projects. The company started
paying dividends in 2013 and has paid USD 490 mln over the last six years.

Alexander Paraschiy: So, in fact
MHP has paid in dividends almost twice as much as it received from the state in
2017-2018. The fact that MHP is among the biggest recipients of state support
in the sector correlates with it being among the biggest and most efficient
farming holdings in Ukraine.

Perhaps it indeed does not need large state support
now, but in the late 2000s the state played important role to make the company
accumulate money for intensive investment projects, including the construction
of large poultry farms (USD 550 mln spent in 2007-2010, USD 750 mln spent in
2013-2016).

We do not expect any negative consequences for MHP
from Zelenskiy’s unexpectedly drawing attention to the company’s “prosperity”.
Nor do we expect any significant state support for the company in the next few
years. The only visible support MHP benefited from last year was compensation
of a part of its CapEx program on poultry farms. In the future, such CapEx
should be much smaller than in 2018, as it has already spent most of the money
planned for the on-going expansion project. Namely, total planned CapEx for its
latest project – Vinnitsa farm phase II with a total capacity of 260 kt poultry
meat – is USD 420 mln for 2018-2022. In 2018, it spent for CapEx USD 232 mln,
mostly for the Vinnitsa project.

All in all, we remain bullish on MHP stock and neutral
on its bonds.