Avangard: Fighting the Tide (April 16, 2015)

Avangard posted a 37% drop in revenues and a 49% drop in EBITDA for 2014. The key drivers for this were the negative effect of the UAH devaluation on sales (while average shell egg prices grew by 12% in UAH terms, in USD terms they fell by 24%) and the decrease in production capacity as a result of the annexation of Crimea and active military clashes in Eastern Ukraine (laying hens’ flock declined by 31% y/y to 18.6 mn as of end-December, which caused a 10% drop in production of shell eggs). The combination of the aforementioned factors with the declining prices of dry egg products and the conflict in Middle East, which affected Avangard’s export sales to the MENA region, resulted in a really bad 4Q2014: the company’s production of shell eggs dropped by 37% y/y, while 4Q2014 EBITDA amounted to just USD 24 mn, a 76% y/y drop compared to 4Q2013. On the positive site, the company’s export share in 2014 amounted to 37%, 8pp higher than in 2013, while Avangard recorded a five-fold increase in sales of its own packaged eggs brand ‘Kvochka’ (although it still comprised only 5% of egg sales). Thus, while the company now looks much “smaller” in terms of production volumes and sales, we are moderately positive on the future prospects of Avangard, reiterating our BUY recommendation with a new target price of USD 4.52 per GDR, or a 61% upside to the current price of USD 2.80. 

Refinancing of Avangard’s Eurobonds due in October 2015 imminent. While the company’s cash balance stood at a healthy USD 117 mn as of end-December, we estimate the company has to pay out around USD 46 mn in coupon and interest payments, as well as another USD 40 mn on maintenance capex in 2015. Considering an estimated cash from operations of USD 71 mn in 2015, Avangard won’t be able to repay its USD 200 mn Eurobonds as they become due. Therefore, under our base-case scenario, the company will refinance its Eurobonds by issuing new notes with prolonged maturity (an amortization scheme with 50% payable in 2018, and another 50% - in 2019 to decrease the pressure on any given year) and an increased coupon rate (10.5%), paying 20% of the principal in 2015 to attract bondholders to convert their old issue. 

The company has lost control of nearly 12% of its laying hens capacities due to the continuing conflict in Eastern Ukraine and occupation of the Crimean peninsula, and had to reduce poultry flock or close down poultry farms in adjacent areas. We expect the company’s production of shell eggs will drop by 14% to 5.4 bn pcs in 2015 as a result. However, we estimate that Avangard will be able to increase its laying hens population to about 22 mn by 2018 by increasing the utilization rate of existing facilities and restoring operation of its poultry farm in Kharkiv (not affected by the conflict in Eastern Ukraine).

The devaluation of the UAH to 24-25 per USD and lower production volumes should result in lower sales this year. We estimate Avangard’s revenue at USD 329 mn in 2015, with two-thirds of sales being generated by the shell egg segment and one-third—by the egg product segment. 

We estimate Avangard’s EBITDA at USD 112 mn in 2015 and USD 94 mn in 2016. EBITDA margin is likely to stay around 30-34% compared to 46% in 2013 as cost inflation catches up with domestic price increases, while global prices remain low. The company’s profitability will be positively affected by the cost benefits of the UAH devaluation on the egg product segment due to the 85% share of export sales, however this is not the case for the shell egg segment, where only 13% of the total sales volume is exported. 

We reiterate our BUY recommendation with a target price of 4.52, implying an upside of 61% to the current market price of USD 2.80 per GDR.

We derive our target GDR price from DCF analysis (50% weight) and relative valuation based on P/E and EV/EBITDA multiples (50% weight) compared with Ukrainian, Russian and global agro peers. Avangard trades at 5.0x 2015 earnings and 2.8x 2015 EV/EBITDA, implying a discount of 9% and 36%, respectively, to its closest peer Ovostar. On a 2015f P/E basis, we estimate that stock trades at discounts of 9% and 60% to Ukrainian and global peers, respectively, while on a EV/2015 EBITDA basis, we estimate that the stock trades at discounts of 39% and 56%, respectively. Our valuation suggests a target price of USD 4.52 per GDR, which implies an upside of 61%.



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