Avangard (December 9, 2014)

Summary

The company’s Eurobonds due in 2015 trade at a YTM of 66% and a 3,451 bps spread to the sovereign curve, which is unreasonably high, in our view, considering the large share of export sales (41% in 9M2014), USD 158 mn cash position as of 30.09.2014, low leverage (net debt/EBITDA ratio of 0.9x as of end-September 2014) and Avangard’s leading position in the non-cyclical egg market. We expect a significant appreciation of the company’s Eurobonds in the intermediate term, presenting a unique opportunity for early investors. 

 

Company description:

Avangard is the largest vertically integrated Ukrainian producer of eggs and dry egg products, #1 in Eurasia and #2 in the world by the number of laying hens. The company has a 57% share in the industrial shell egg market segment and an 86% share in the dry egg market segment in Ukraine. Avangard is also a flagship exporter of dry egg products with a 97% share in value terms in 2013. The company operates two poultry complexes (Avis and Chornobayivske), 19 farms for laying hens, three breeder farms, ten grow-out farms, six fodder mills, four storage facilities and an egg-processing plant (Imperovo foods).

Key points:

Avangard’s extensive CapEx program is coming to an end in 2014. The completion of the Avis and Chornobaivske projects increased the capacity of laying hen farms by 18% y/y in 2013 to 27 million (approximately 7.7 billion shell eggs per annum), while the egg processing capacity of Imperovo Foods grew 2x to 6 million eggs per day (approximately 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 million eggs by end-2014.

Diversified exports serve as a natural hedge of currency risks. As of 2013, Avangard exported shell eggs and egg products to 33 countries globally, including Middle East, Asia, and Northern Africa. Moreover, on October 1, 2014, Imperovo Foods (the company’s egg processing plant) received approval to export its products to the EU. The company generated 41% of its revenues from export operations in 9M2014.

Solid cash position of USD 158 mn as of 30.09.2014 implies a leverage ratio of just 0.9x, which is well below the Ukrainian agricultural peers’ average. The company’s EBITDA/interest expense ratio was 4.6x in 9M2014. Considering low expected capital expenditures for the next year (USD 38 mn), and a forecasted net operating cash flow of USD 153 mn, the company is well positioned to repay USD 200 mn of its Eurobonds due in October of 2015.

Announced buyback of USD 30 mn should support Eurobond prices and narrow the spread of the issue to the sovereign curve.

Risks:

Devaluation of local currency will have a direct negative influence on sales. However, it will also improve export margins. According to the company’s latest press-release, exports constituted 41% of total sales in 9M2014. As of 30 September 2014, the company reported a non-cash comprehensive loss of USD 550 mn, which was mainly due to the devaluation of PP&E.

The conflict in Eastern Ukraine had a negative effect on the company’s poultry flock (down 18% y/y to 25.9 mn as of 30.09.2014), as Avangard had to close down two poultry farms in the region and stop the renewal of poultry flock due to safety concerns. Moreover, the company’s domestic sales of shell eggs were down by 10% y/y to 3.0 billion pieces in 9M2014 due to lower domestic demand. However, most of the company’s operations are located in Western and Southern Ukraine.

 

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