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%.

 

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