Avangard: initiating coverage report (October 22, 2014)

Avangard, the leading vertically integrated producer of eggs and dry egg products in Ukraine and #1 in Eurasia, has introduced a sustainable dividend policy with a pay-out ratio of 12.5% for 2013 and range of 15%-40% in subsequent periods, thus becoming the second heavy dividend stock in the Ukrainian agro universe. The company is poised to finish its intensive CapEx program by end-2014, indicating the possible maximization of dividend payout ratio afterwards.

Moreover, Avangard is expanding its sales geography within the MENA markets and has passed all the compliance procedures to export its produce to the EU, the largest importer of eggs and egg products globally. Avangard’s stock is one of the cheapest in Ukraine’s agro/food universe, trading at a 54% discount based on the P/E multiple (2.9x vs. 6.2x), and at a 47% discount based on the EV/EBITDA multiple (2.5x vs. 4.7x). We also view the anticipated IPO of Avangard’s mother company UkrLandFarming, with the opportunity to convert Avangard’s shares into ULF’s equity at 150-367% premium to the current price, as a key mid-term trigger which, together with a sustainable dividend policy, may drive the stock market multiples closer to local or even global peer figures. Based on our valuation resulting in a 153% upside, we recommend BUYing the shares of Avangard with a target price of USD 16.44 per GDR.

  • Three major projects boosted Avangard’s capacities. The completion of Avis and Chornobaivske projects increased the capacity of laying hen farms by 18% y/y in 2013 to 27mn (approx. 7.7 bn shell eggs per annum), while the egg processing capacity of Imperovo Foods grew 2.x to 6 mn of eggs per day (approx. 28,800 tons of dry egg products per annum). According to the company’s statement, the capacity of Imperovo Foods is expected to further increase to 10 mn of eggs by end-2014.
  • Devaluation of local currency will drag sales down in 2014, but improve export margins, as according to the latest press-release of the company, exports constituted 39% of total sales in 1H2014. As of 30 June 2014, the company reported a non-cash impact on balance sheet of USD 462 mn, which directly affected the value of the company’s assets (most notably PP&E). 
  • Impact of conflict in Eastern Ukraine should  be limited to the decrease in domestic demand for shell eggs in 2014 and the optimization of the poultry flock between the company’s farms. Avangard’s domestic sales of shell eggs were down by 7.4% y/y to 2.08 bn pieces in 1H2014, a trend which we expect to be continued in 2H2014, however there might be some improvements after the conflict subsides.
  • Avangard introduces dividend policy. Avangard has approved a sustainable dividend policy going forward with the payout ratio of 15%-40% of annual net income. According to the latest AGM on September 30, 2014, the company will pay 12.5% of FY2013 net income in dividends, implying approx. USD 0.46 per GDR in 2014 and a dividend yield of 7%. As of  June 30, 2014, Avangard had USD 236 mn of cash, which is more than enough to make the dividends payment and partially buy-back Eurobonds. We believe the company should maximize its dividend payout ratio starting from 2016 after repayment of USD 200 mn of Eurobonds in 2015.
  • ULF’s IPO: premium exit for Avangard’s investors. On January 13, 2014, ULF announced that Cargill acquired a 5% stake in ULF, while the total consideration amounted to USD 200 mn (according to Financial Times), implying the equity value of USD 4 bn and EV of USD 5.29 bn for ULF. The deal implies ULF’s EV/EBITDA multiple of 6.3x on the back of 2013 EBITDA of USD 842 mn, which in its turn implies Avangard’s price per share of USD 27.02 or 316% upside from current market price.
  • Valuation. 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 to three peer groups: Ukrainian, Russian and global agro peers. Avangard trades at 2.9x of 2014 P/E and 2.5x of 2014 EV/EBITDA with 58% and 43% discounts, respectively, compared to its closest peer Ovostar. The stock trades with a 54% discount to Ukrainian peers and a 79% discount to global peers on 2014 P/E, respectively, while 2014 EV/EBITDA multiple implies discounts of 47% and 65%, respectively. Our valuation suggests a 153% upside, and we recommend BUYing GDRs of Avangard with a target price of USD 16.44 per GDR.

For our Initiating coverage report on Avangard please contact us by:

Phone: + 38 044 237 77 27, NY: +1 917 475 04 47

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