Gradus: Let’s buy some chickens! (BUY - initiation of coverage)

We initiate coverage of Gradus, with a BUY rating and a 12M price target (PT) of BGN 1.76/share (20% upside potential). The company produces chicken meat (a 39% share of its 2019 revenues) and breeding eggs (28%), and the latter segment makes the largest contribution to the group’s operating profit (48% in 2019). Gradus is the largest poultry meat producer in Bulgaria (a 35% market share, according to the company) and it has strong brand recognition (the first-choice brand for 68% of consumers in Bulgaria). Moreover, we like its vertically-integrated business, which allows it to capture margins throughout the entire production chain. On top of this, we also see Gradus’ financials as very encouraging: we expect a 2019-22E EBITDA CAGR of 21% (due mostly to the expansion of its chicken and eggs production in 2020E), coupled with low leverage (on our numbers: net debt/EBITDA at 0.4x at end-2020E, dropping to a net cash level of 0.2x at end-2022E). In our view, the combination of profit growth and deleveraging should result in higher dividend payments: we expect a DPS of BGN 0.04 (a 3% dividend yield) from both the 2020E and 2021E profit.