MHP - Headwinds Behind, Recovery May Drive Rerate

An outbreak of the avian influenza in Ukraine coupled with the disruption of poultry demand caused by the pandemic undermined both the export volumes and selling prices (both domestic and export) of MHP. We incorporate recent developments and decrease our 2020-21 EBITDA forecasts by 25% on average, and cut our target price from $10.00 to $6.50 per share. However, given the drastic decline in the stock price, we raise our recommendation to BUY. We think the negative news is already priced in and that 2H20 will be more favorable thanks to a recovery in poultry global prices and rising export volumes. At a 2021E EV/EBITDA of 4.2, the stock is trading at a 7% discount to its three-year historic average and suggests a 5.1% dividend yield to be paid in 2021, while when leverage decreases below 3.0, which we expect, higher dividends in 2022 may be triggered.MHP reported 2Q20 IFRS results on Friday. An outbreak of the avian influenza in Ukraine and the disruption to the poultry market caused by the pandemic resulted in a sharp decline in demand and undermined both domestic and global chicken prices. MHP's consolidated revenues fell 17% y-o-y to $425 mln in 2Q20, largely due to a 20% decrease in poultry sales driven both by lower volumes (by 6%) and prices (by 16%). Export revenues dropped to $215 mln, or 51% of total sales, which is down from a respective $284 mln and 56% in 2Q19.Thus, the core poultry division saw a 24% EBITDA (net of IFRS16) decline y-o-y to $126 mln with a 30% margin (down from 32% the year before). Cash EBITDA per kilogram of chicken meat (adjusted for the revaluation of biological assets) declined 24% y-o-y to $0.35 in 2Q20 (flat Q-o-Q). EBITDA of the grain segment fell to $56 mln in 2Q20, from $63 mln in 2Q19 (attributable to the sale of crop inventories held over from 2018). As for Perutnina Ptuj, it generated EBITDA of $15 mln in 2Q20, up from $12 mln a year before, thanks to the higher share of more profitable processed meat. All in all, MHP's consolidated cash EBITDA amounted to $126 mln in 1Q20, down from $165 mln in 2Q19.The company recognized a non-cash FX loss of $52 mln amid hryvna depreciation, due to which net income constituted $112 mln. The company ended the quarter with a net debt/LTM EBITDA ratio of 3.72, elevated level due to seasonal factors. During the conference call following the results, the management guided for over 200 kt in exports in 2H20, full-year profitability being similar to 2019, a working capital investment of $120 mln and capex of $100 mln in 2020. The company targets a net debt/EBITDA ratio of 3.0-3.1 at the end of this year, which is above the Eurobond covenant of 3.0 that restricts dividend payments (the maximum allowed is $30 mln), investment, mergers and financing of any kind to third parties.We incorporated in our model the 1H20 performance, lower poultry price forecasts and an exchange rate of USD/UAH 27.5 for 2H20 and going forward. We are downgrading our revenue forecasts for 2020-21 by 9%, and cutting our EBITDA projections for the same periods by 25% on average. Thus, we lower our target price from $10.00 to $6.50 per GDR. However, taking into account the drastic share price decline we upgrade our recommendation to BUY. We assume that the negative news is behind and that 2H20 will see a recovery in poultry demand, so the company will manage to build up exports. We expect MHP's overall selling poultry prices to be 5-6% higher in 2H20 than in 1H20 due to a higher average export price and also due to a higher share of exports. The company should also benefit from a weaker hryvnia.The stock is valued at a 2021E EV/EBITDA of 4.2 on our updated numbers, below its historic average of 4.5. We assume $30 mln in dividends to be distributed in 2021, which suggests a 5.1% yield. However, our model shows that net debt/EBITDA may decline below 3.0 by the end of 2021, so we assume the company may resume distributing $80 mln as annual dividends in 2022.