(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed Ukraine-based poultry and agriculturalproducer MHP S.A.'s (MHP) Long-term foreign currency Issuer Default Rating (IDR)at 'B' with a Stable Outlook. The rating is capped by Ukraine's Country Ceilingof 'B'. Fitch has also affirmed the company's Long-term local currency IDR at'B+' with a Stable Outlook. The senior unsecured rating applicable to MHP'sguaranteed bonds has been affirmed at 'B' with a Recovery Rating of 'RR4'.
The affirmation reflects MHP's strong operating and financial performance, whichexceeded Fitch's expectations in 2011 and so far in 2012. The ratings alsofactor in the expectation of solid credit metrics through to 2014 as capex willreduce drastically from next year once the first stage of the Vinnitsa projectcomes on stream in early 2013 adding 50,000 tonnes of chicken meat/year of theplanned 220,000 tonnes expansion by 2015.
MHP continues to benefit from strong vertical integration into farming andfodder production. However, its profile remains constrained by its operationalfocus on one source of protein (poultry) and by geography. Lack ofdiversification together with the currency mismatch between profits (mainly inUAH) and debt (mainly in USD) translates into a higher risk profile relative tocompanies of the sector in more developed markets. The increasing share ofexports, both poultry and sunflower oil, partially mitigates any FX mismatchissues.
EBIT margin (excluding VAT refunds and other government grants and before IAS41gains) improved by 160bp to 17.3% in 2011, which is high relative to otherpoultry producers that are not integrated into farming, especially in NorthAmerica and Brazil (in the mid-to-high single digits). MHP's strongprofitability is aided by growing meat consumption - poultry is the cheapestavailable choice and accounts for the majority of the increase in consumption -its high market share domestically and strong pricing power. Following anaverage increase of 28% for chicken meat prices in H112 relative to H111,clearly outpacing the rise in production costs, some of the latest profit gainsmay unwind as high grain and feed prices will likely negatively affect marginsin 2013. MHP will likely still record healthy profitability under sales toexternal parties in its grain-growing business.
Under a hypothetical sharp depreciation of the hryvnia, Fitch estimates thatMHP's FFO adjusted leverage would be marginally impacted. This is mitigated bythe relatively high and rising share of exports (11% of total sales volume ofpoultry and sunflower oil) altogether representing USD400m-USD450m in annualforeign-currency receipts, compared with very modest levels in 2008, thecorrelation between the price of chicken in the Ukrainian market and thecurrency rate and the planned reduction in capex for 2013.
Fitch expects positive free cash flow from 2013, with the FCF margin averaging9% between 2013 and 2015. These should result in a sustained reduction inFFO-adjusted net leverage from an expected level of above 2.5x in 2012, towards1.6x by 2015 and healthy interest cover, measured as FFO fixed charge cover,above 5x, despite the assumption of selective acquisitions (mainly land bank)and opportunistic share buy-backs. In Fitch's view, this represents a reasonablelevel of refinancing risk for MHP's existing Eurobond due in 2015. These creditmetrics place MHP strongly in the 'B' rating category.
WHAT COULD TRIGGER A RATING ACTION?Positive: future developments that may, individually or collectively, lead topositive rating action on the local currency IDR include:- Greater business diversification and/or scale (the latter boosted by astronger and sustained export presence)- Evidence of sustained positive FCF- FFO adjusted net leverage consistently below 2x
An upgrade of the foreign currency IDR would be possible only if the CountryCeiling for Ukraine was upgraded (currently 'B').
Negative: future developments that may, individually or collectively, lead tonegative rating action on the local currency IDR include:- FFO adjusted net leverage rising above 2.5x due to sustained operationalunderperformance, aggressive capex plans or share buy-backs, or prompted by asharper than expected depreciation of the hryvnia- FFO fixed charge cover weakening below 4x
The foreign currency IDR would also come under pressure in the event ofsubstantial weakening in the foreign-currency interest cover ratio (measured byexports to total cash interest in foreign currency) below 3x.
Fitch has also affirmed MHP's subsidiary OJSC Myronivsky Hliboproduct, asfollows:
Long-term foreign currency IDR: affirmed at 'B'; Stable OutlookLong-term local currency IDR: affirmed at 'B+'; Stable OutlookNational Long-term rating: affirmed at 'AA+(ukr)'; Stable Outlook
Additional information is available on
. The ratings abovewere solicited by, or on behalf of, the issuer, and therefore, Fitch has beencompensated for the provision of the ratings.
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, areavailable at
.Applicable Criteria and Related Research:Corporate Rating Methodology(New York Ratings Team)