(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed Ukraine-based poultry and agricultural producer 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 Ceiling of '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's guaranteed bonds has been affirmed at 'B' with a Recovery Rating of 'RR4'.
The affirmation reflects MHP's strong operating and financial performance, which exceeded Fitch's expectations in 2011 and so far in 2012. The ratings also factor in the expectation of solid credit metrics through to 2014 as capex will reduce drastically from next year once the first stage of the Vinnitsa project comes on stream in early 2013 adding 50,000 tonnes of chicken meat/year of the planned 220,000 tonnes expansion by 2015.
MHP continues to benefit from strong vertical integration into farming and fodder production. However, its profile remains constrained by its operational focus on one source of protein (poultry) and by geography. Lack of diversification together with the currency mismatch between profits (mainly in UAH) and debt (mainly in USD) translates into a higher risk profile relative to companies of the sector in more developed markets. The increasing share of exports, both poultry and sunflower oil, partially mitigates any FX mismatch issues.
EBIT margin (excluding VAT refunds and other government grants and before IAS41 gains) improved by 160bp to 17.3% in 2011, which is high relative to other poultry producers that are not integrated into farming, especially in North America and Brazil (in the mid-to-high single digits). MHP's strong profitability is aided by growing meat consumption - poultry is the cheapest available choice and accounts for the majority of the increase in consumption - its high market share domestically and strong pricing power. Following an average increase of 28% for chicken meat prices in H112 relative to H111, clearly outpacing the rise in production costs, some of the latest profit gains may unwind as high grain and feed prices will likely negatively affect margins in 2013. MHP will likely still record healthy profitability under sales to external parties in its grain-growing business.
Under a hypothetical sharp depreciation of the hryvnia, Fitch estimates that MHP's FFO adjusted leverage would be marginally impacted. This is mitigated by the relatively high and rising share of exports (11% of total sales volume of poultry and sunflower oil) altogether representing USD400m-USD450m in annual foreign-currency receipts, compared with very modest levels in 2008, the correlation between the price of chicken in the Ukrainian market and the currency rate and the planned reduction in capex for 2013.
Fitch expects positive free cash flow from 2013, with the FCF margin averaging 9% between 2013 and 2015. These should result in a sustained reduction in FFO-adjusted net leverage from an expected level of above 2.5x in 2012, towards 1.6x 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 reasonable level of refinancing risk for MHP's existing Eurobond due in 2015. These credit metrics place MHP strongly in the 'B' rating category.
WHAT COULD TRIGGER A RATING ACTION? Positive: future developments that may, individually or collectively, lead to positive rating action on the local currency IDR include: - Greater business diversification and/or scale (the latter boosted by a stronger 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 Country Ceiling for Ukraine was upgraded (currently 'B').
Negative: future developments that may, individually or collectively, lead to negative rating action on the local currency IDR include: - FFO adjusted net leverage rising above 2.5x due to sustained operational underperformance, aggressive capex plans or share buy-backs, or prompted by a sharper 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 of substantial weakening in the foreign-currency interest cover ratio (measured by exports to total cash interest in foreign currency) below 3x.
Fitch has also affirmed MHP's subsidiary OJSC Myronivsky Hliboproduct, as follows:
Long-term foreign currency IDR: affirmed at 'B'; Stable Outlook Long-term local currency IDR: affirmed at 'B+'; Stable Outlook National Long-term rating: affirmed at 'AA+(ukr)'; Stable Outlook
Additional information is available on
. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at
. Applicable Criteria and Related Research: Corporate Rating Methodology (New York Ratings Team)