MHP - Improving Financials to Drive Re-Rate

MHP's 1H21 financials exceeded our expectations, despite the impact of bird flu and higher fodder costs. We anticipate another strong set of financials for 3Q21 thanks to increased poultry prices in both export and domestic markets and favorable weather. We expect the tailwinds to remain beyond 3Q21 and raise our EBITDA projection by 32% for 2021 and by 2% for 2022. We lift our target price to $10.00 per share and upgrade our recommendation to BUY. At a 2022E EV/EBITDA of 4.8, the stock is trading at a 10% discount to its five-year average. As the company has already brought its net debt/EBITDA below 3.0, we expect strong dividends in 2022, suggesting a 9% dividend yield at the current price, which, coupled with record financials this year, should drive a re-rate.> We expect decent financials for 3Q21. We forecast 19% y-o-y revenue growth on the back of elevated poultry and grain prices. Although we estimate production costs rose 20-30% y-o-y, we still expect an uptick in the gross margin as the grain segment has benefited from a strong harvest this year and high prices for corn and wheat. We expect this segment to make a strong contribution to the EBITDA line and project EBITDA (net of IFRS 16) of $123 mln, for a 19% EBITDA margin.> Poultry and grain prices to remain elevated in 2022, while vertical integration should keep profitability decent. Poultry prices began their seasonal decline in October, but we expect them to remain high both globally (supported by high fodder and fertilizer prices) and locally (due to lower livestock numbers), which should support MHP's top line. Vertical integration should enable the company to retain decent profitability in the poultry segment.> Forecast changes. We put the 9m21 results in our model and updated our forecasts for poultry and grain prices. We also adopted a more positive outlook on leverage. We raised our EBITDA forecasts (net of IFRS 16) to $524 mln (excluding revaluation gains) for 2021 and $447 mln for 2022. We model USD/UAH at 27.0 in 2021 and 27.5 afterward. > Valuation. The stock is trading at a 2022E EV/EBITDA of 4.8, on our updated numbers, below its five-year average. We expect net debt/EBITDA to remain below 3.0 and assume a dividend payout of $80 mln will be distributed in 2022, which implies a yield of more than 9%. Our $198 mln FCF estimate for 2022 implies a yield of more than 20%, which may boost the dividend (as long as there are no M&A deals) and serve as downside protection for the stock. We raise our target price from $6.00 to $10.00 per GDR and upgrade the stock to BUY.