Avangard - Time to Refinance (February 2, 2015)

After approving a dividend payment of USD 29.5 mn on September 30, 2014 and declaring it to be paid by December 30, 2014, Avangard hasn’t made any transfers to investors yet. Moreover, the company has remained silent with regard to the reasons of the delay, which in our view has resulted in a stock price drop of 9%  m/m to a historic low to USD 1.83 per GDR, while prices of the company’s Eurobonds have plummeted by 15 points to 50 cents on the dollar in January 2015. However, on Thursday, January 29, Avangard issued a press-release, announcing that the company intends to only pay the dividends to minority shareholders, while delaying the payment to its majority shareholder UkrLandFarming, which may reflect the limited access to capital necessary to finance the redemption of USD 200 mn of Eurobonds maturing in October 2015 and could signal a pending refinancing of the Eurobonds. Our scenarios indicate a fair price of 43-58 vs. the current price of 45.

Avangard intends to pay the dividends to minority shareholders only (USD 6.6 mn) during week of March 2, 2015, while delaying the payment to majority shareholder (USD 22.9 mn) for the sake of supporting the company’s liquidity and to ensure fair treatment of equity holders, bondholders and banks. We view such approach as a responsible decision by the company and its majority shareholder. The company pointed the key reasons for revision of dividend repayment schedule being challenging economic and political conditions, sharp UAH devaluation (the UAH has devalued by 32% since the dividend was approved at the September 2014 AGM, and by 57% since the beginning of 2014) and the continuing conflict in the East of Ukraine. 

The company has lost control of nearly 15% of its laying hens capacities due to the continuing conflict in Eastern Ukraine and occupation of the Crimean peninsula. Nevertheless, as the company had excess capacity in 2013, we estimate that the production volumes will shrink by just 9% y/y in 2014 and will, by 2016, return to 2013’s peak production level.

We estimate 2014 revenues at USD 482 mn (-27% y/y), mainly due to UAH devaluation. As a result, 2014 EBITDA should be lower by 53% y/y at USD 142 mn. We expect net cash from operations to decline sharply in 2014 to USD 79 mn (-58% y/y), affected by an increase in trade receivables as a result of extended payment terms, decreased  profitability, and a slight increase in inventories. We expect revenues to gradually rebound through 2015-2018 driven by expanding export sales (from 40% in 2014e to 50%+ in 2018) and by higher egg prices in Ukraine adjusting for inflation and UAH devaluation. We project net OCF to gradually rebound in 2015 to USD 88 mn and in 2016 to USD 117 mn, which raises hope for investor-friendly restructuring terms.

We estimate that the UAH’s 57% devaluation since 2014 will result in a direct FX loss of USD 49 mn and FX losses through “Other comprehensive loss” (mainly devaluation of book value of the company’s assets) of USD 760 mn.

Liquidity squeeze in Ukraine may impel the company to refinance its Eurobonds. We estimate the company’s total debt at USD 341 mn and cash & equivalents of USD 159 mn as of 2014-end, implying a 2.4x leverage ratio. Nevertheless, if we assume a full Eurobond repayment in October 2015, we project the company would have USD 180 mn of debt with just USD 3 mn of cash & equivalents at 2015-end, which assumes successful refinancing of some credit lines. But we feel this is an optimistic assumption given the liquidity squeeze observed now in Ukraine. This makes us believe that the company will seek to refinance its Eurobonds.

We‘ve run 3 scenarios of potential refinancing which we assume to occur in March 2015. the scenarios vary by initial cash consideration (0-20%), coupon (10-10.5%) and maturity of new issues (3-5 years) - please see page 2 for details. We assume that the new bonds will trade with a yield of 40-48%, close to the YTM of ULF-2018 Eurobonds. The scenarios run indicate that a fair price for the company’s Eurobonds should be in the range of 43-58 compared to the current price level of 45, and implying a return to investors in the range of 38-77%.



Although the information in this report has been obtained from sources which Empire State Capital Partners believes to be reliable and was collected in good faith, we do not represent or warrant its accuracy, except with respect to information concerning Empire State Capital Partners, its subsidiaries and affiliates, either expressly or implied, and such information may be incomplete or condensed. Nor has the information and/or data been independently verified, and so is provided without further caveat regarding its reliability, suitability for commerce or specific purpose. 

This report does not constitute a prospectus and is not intended to provide the sole basis for an evaluation of the securities discussed herein. All estimates and opinions included in this report constitute our judgment as of the date of the report and may be subject to change without notice. Empire State Capital Partners or its affiliates may, from time to time, have a position or make a market in the securities mentioned in this report, or in derivative instruments based thereon, may solicit, perform or have performed investment banking, or other services (including acting as advisor, manager) for any company referred to in this report and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which it is based, before its publication. Empire State Capital Partners will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission. This report is confidential and is being submitted to select recipients only. It may not be reproduced (in whole or in part) without the prior written permission of Empire State Capital Partners.

Any recommendations, opinions, forecasts, estimates or views herein constitute a judgment as at the date of this report. This document has been produced independently of Empire State Capital Partners and the recommendations, forecasts, opinions, estimates, expectations, and views contained herein are entirely those of the research analyst(s). While all reasonable care has been taken to ensure that the facts presented herein are accurate and that the respective recommendations, forecasts, opinions, estimates, expectations, and views are fair and well considered, none of the research analyst(s), Empire State Capital Partners or any of its directors, managers or employees has verified the contents of this document and, accordingly, no research analyst, Empire State Capital Partners or any of its respective directors, managers or employees shall be in any way responsible for its contents.