Boparan – Relationships - Model Update
All,
Please find our updated analysis here.
Boparan continues to deliver in Poultry, but the smaller Meals and Bakery division is having problems recovering inflation-driven cost increases. We expect that FYE 2025 was the high point for margins and EBITDA as grocers will look to claw back some of Boparan’s profitability. The company has exceeded our expectations in managing the relationship with its major grocery clients, and its relationship with the Boparan family remains equally supportive so far.
Investment Consideration:
- We have not taken a position in the Boparan SSNs. The bonds trade at 105p/£ and are callable at 104.7 in July 2026, so upside is zero. We see a potential 6 points of downside (YTW c10%) if there is significant pushback from grocery clients on poultry pricing.
- The relationship with the grocery clients is much better than in the past, but price competition is hurting the UK supermarkets, and they will want to share that pain.
- Our bias had been to go short on the Q2 25/25 results, which were published, but the results were stronger than we forecast, and so far, there is no sign of pushback on the poultry business regarding ex-feed cost inflation. The Meals & Bakery division continues to under-recover inflationary costs, impairing EBITDA
- We expect FYE 25 EBITDA to be near the peak for Boparan.
- However, we are long-time sceptics of Boparan, and we expect the profitability of the Poultry business to be under pressure despite 75% of the feed costs being covered by ratchet mechanisms. Pressure will increase as inflation is added to the price competition between grocers.
- The Meals & Bakery business continues to struggle to pass through higher costs.
- Our DCF calculations show £350m of equity below the bonds, but a potential dip in profitability would require us to cut our forecasts.
Key Conclusions:
- Boparan remains vulnerable to push back from UK grocers on pricing (as has happened in Meals & Bakery). The relationship with the grocers is holding for now, but we could see pressure in the future.
- Our model assumes that EBITDA margins are around 6% (for the group) over the next two years. Our model shows FCF/Int Cover trending to 2x. However, this assumes margins can be maintained.
- As our Trading section shows, the Poultry results since the Nov-24 refinance have been ahead of our expectations, but the Meals & Bakery business continues to struggle. The Poultry division results are impressive, but we expect that they are near the high point.
- As highlighted in our Risk and Value drivers’ section, the cost pass-through arrangements do not cover the recent tax rises, and we expect grocers to start to push back.
- The supermarket customers will be aggressive in pricing, but the impact of distress at a major poultry supplier is not something the supermarkets want to risk.
- Our competition section highlights the importance of the Boparan family throughout the supply chain and its importance in any future restructuring.
Current Trading:
- Q1 25/26 Results
Boparan continues to surprise us on the upside. Strong performance in the Poultry business more than made up for continued weakness in Meals and Bakery. We had worried that the price friction in the UK grocery sector would have seen pressure on Poultry prices, but so far that has not happened, and The Poultry business is continuing to improve volumes and price points. The relationships with the Supermarkets clearly remain positive. The Meals & Bakery business is having more difficulty passing on inflationary costs and was only marginally profitable in Q2; having M&S as such a dominant customer will make these negotiations tough.
- Q4 24/25 Results
Whilst the Q4 numbers exceeded our expectations, we expect FYE 2026 to be tougher, as grocery customers seek to shore up their own margins. However, Boparan remains bullish on the poultry business and says it is not seeing evidence of customer pushback on cost pass-throughs. We have been too negative on the name and missed the strong performance since the refinance, but we are not convinced that Boparan can defy gravity forever, and we expect the £167m LTM EBITDA to be at or near the top for Boparan. Meals & Bakery continues to struggle, but with leverage under 2x (headline basis), Boparan can carry the business for now. The pension regulator closing out possible action against Boparan is a relief, but the company had already agreed a pathway to closing the £130m funding gap. Boparan has £155m in off-balance sheet factoring, which was more than we expected, but not enough to raise a red flag. We will continue to ask the question on future calls.
- Poultry EBIT margins were 8.1%, and we expect some pushback from grocers in FYE26.
- Meals & Bakery EBIT margins were 2.2% as the division continues to struggle with the pass-through of higher costs. We do not expect any relief on this in FYE 2026.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055