Boparan - Waiting Game - Model Update
All,
Please find our updated analysis here.
Boparan has performed better than we anticipated since it completed its refinance in November 2024. We remain concerned that inflation, tax increases, and price competition in the UK grocery sector will put pressure on the company. We have not taken a position, but our bias is to the short side, and we will review after the FYE 25 (to July) results are published at the end of October.
Investment Discussion:
- We have not taken a position in Boparan. At 105c/€ the bonds are call constraint (callable at 104.7 in July 2026 ) and we see a maximum of two points of upside for seven of downside in the next 6 months. Our bias is to go short following the FY 24/25 results (due on 30th October), if we see clients beginning to push back on cost inflation (ex-feed) and staff tax cost increases to create further margin pressure. The results to April 25 only reflected a very brief period where the new taxes were reflected in operating results.
- Boparan completed its refinance in November 2024, and in the quarters reported since, the results have continued to be strong. However, we are long-time sceptics of Boparan, and we expect the Poultry business to be under pressure. Inflation of >3.5% and price competition between grocers will increase pricing pressure. This will hit the Meals & Bakery business initially, as they do not have a price ratchet system, but pressure on poultry pricing will rise.
- The poultry business has some protection with 75% of feed costs subject to a ratchet system.
- Our DCF calculations show £350m of equity below the bonds, but we are concerned about a potential dip in profitability that would require us to cut our forecasts.
Key Conclusions:
- Our DCF model shows £400m of equity value below the bonds, but we have seen significant pressure on EBITDA at Boparan before, as Grocers looked for cost savings.
- 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. Costs will have risen in Q4 FYE25.
- 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.
Trading has been stronger than we thought:
Q3 24/25
Revenue and EBITDA (including margins) were ahead of our estimates. Poultry benefited from destocking, which boosted prices. However, Meals and Bakery continue to suffer from inefficiencies in passing through higher costs. Working Capital was better than we anticipated, and alongside the higher EBITDA, it meant cash flow was stronger than we expected.
Q2 24/25
Topline and Gross Profit/EBITDA were broadly in line with our estimates; operating cash flow was higher due to a better-than-expected payables performance in the working capital line. We expect a harder H2 as the higher living wage and national insurance costs kick in. Boparan is seeking price increases from customers, but we still expect to see some margin attrition. ASDA’s price cuts will mean that there will be more pushback on non-feed price pass-throughs.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055