Each week we screen thousands of corporate bond listings to find what we believe is currently the best corporate bond for investors needing or seeking higher yields with the least amount of risk possible relative to its projected return. This week we look at high 10% yielding bonds from a leading eastern European poultry producer that has lowered its costs, and maintained its revenues by increasing both its production and its exports (especially to the European Union). Consequently, its profits have climbed, leading us to believe that the discounted price of these 70 month, 8.25% couponed, bonds is significantly undervalued. Therefore, we have chosen them for addition to our Fixed-Income1.com and Fixed-Income2.com Global High Yield portfolios.
Myronivsky Hilboproduct (OTC:MHPSY) is the largest poultry producer in Ukraine, with a market share of about 54% of industrially produced poultry. The company grows feed for use in its own operations and for external sale, and also produces premium beef and foie gras, as well as other products. MHP owns one of the best-recognized Ukrainian food brands: Nasha Riaba, and supplies to over 50 countries around the world.
MHP sells most of its chicken products under the ‘‘Nasha Riaba’’ brand. MHP also sells convenience food products under the ‘‘Lehko!’’ brand, premium beef under the ‘‘Certified Angus’’ brand, foie gras under the ‘‘Foie Gras’’ brand and sausages and cooked meat products under the ‘‘Druzhba Narodiv’’, ‘‘Baschinsky’’ and ‘‘Europroduct’’ brands. MHP’s other meat products are sold principally to retailers and supermarkets.
MHP’s assets include five broiler chicken farms, two breeder farms with facilities for producing hatching eggs, 11 distribution centers and a refrigerated delivery vehicle fleet that enables them to distribute product directly to its customers. The company’s operations are vertically integrated, with the entire production process, from hatching to finished poultry products, contained within its own facilities.
The company is in the process of a major expansion, building a new facility in Vinnytsia that will contain broiler production complexes, a breeder farm and hatchery, a fodder complex and a slaughterhouse. While it’s overall enterprise valuation of about $2.5 Billion is much smaller than the more familiar Tyson Foods (TSN)’s valuation, at nearly $15 Billion, or Pilgrim’s Pride (PPC) at, at about $7.67 Billion, it will be the largest of its kind in Europe, transforming MHP into one of the largest poultry production companies in the world.
Where Some Only Focus On Uncertainties, We Frequently Find Great Opportunity
In February of this year, an international crisis arose in the Crimean peninsula over whether the Crimea would remain part of Ukraine or become part of Russia. While we cannot and will not predict the outcome of this dispute, it is interesting to examine its economic effects, and in that light appreciate the business execution and the foresight shown by MHP management.
In January 2013, Ukraine received permission to export poultry products into EU countries. This permission was the outcome of years of preparation and negotiation to ensure that MHP’s products met the stringent food import criteria of the EU. During the first quarter of 2014, poultry exports to Custom Union territories (Russia, Belarus, and Kazakhstan) were banned. For other companies, this might have proven disastrous. MHP, however, continued to diversify its export markets by increased sales to Middle Eastern, Asian, African and some CIS countries – and especially to the EU.
In addition, the turmoil in Ukraine caused its currency, the hryvnia, to fall by about 40% against most currencies, including the US dollar. A large amount of MPH’s costs, such as labor and taxes, internal supplies, etc., were affected by the currency drop, while sales held at just about level. (Overall revenues were up 2% year-over-year in the first quarter of 2014.) MPH’s internal margins expanded robustly. Since most commodity transactions are denominated in US dollars, MHP’s poultry products effectively got about 40% cheaper in the countries to which they were exporting, based on the reduced costs. As a result, export sales volume for the quarter increased by 31% to 30,370 tonnes, compared to 23,200 tonnes in Q1 2013.
Based on these data points, it appears that MHP’s strategy is working extremely well. The completion of the first stage of the company’s Vinnytsia expansion project is expected to add 25,000 tonnes per quarter (or 45%) to its processing capacity in 2014. It is believed that MHP’s strategy is to target most of that capacity for EU countries. It impressed us that MHP has been building its processing capacity during this time of turmoil in the Ukraine, while successfully expanding its export business and increasing its cash flow throughout.
It is also interesting to note that, as a hedge against the Ukrainian currency devaluation, MHP sells all of the rapeseed, soybean and most of the wheat it produces, as well as corn in excess of internal consumption, for export — to receive USD-denominated proceeds.
Recent Quarterly and Annual Results
MHP’s emphasis in recent quarters has been to increase its export business, taking advantage of the reduced costs of its products to customers outside the Ukraine.
In its most recently reported quarter (Q1 2014), consolidated revenue totaled US$309 million, 2% higher than in Q1 2013. Export of chicken meat in Q1 2014 increased by 31% compared to Q1 2013, as noted earlier. Total export sales of poultry, sunflower oil and grains reached US$119 million, or 39% of total revenue in Q1 2014.
EBITDA increased by 45% to US$106 million over the year-ago quarter, driven by higher poultry production volumes and decreasing costs of chicken production resulting from lower grain costs. Correspondingly, EBITDA margin increased from 24% in Q1 2013 to 34% in Q1 2014.
In Q1 2014 net income (before losses due to devaluation) grew by 64% to US$51 million (Q1 2013: US$31 million), in line with EBITDA trends.
We like companies with good operating cash flow
As a result of MHP’s emphasis on exports, its vertical integration, and its prominent position in the marketplace, cash flow from operating activities jumped from US$198 million in 2012 to US$331.6 million in 2013 – a 67% year-over-year increase.
We like companies that execute well in difficult times
Events in Ukraine over the past year have given rise to much uncertainty about that country’s political and economic future.
Despite these uncertainties, MHP has executed well on its core strategies – vertically integrating its operations and emphasizing its export business to take advantage of the changing value of the Ukrainian hryvnia.
In addition, and perhaps most importantly – people always have to eat. The more that countries and economies prosper, the more people want to eat protein. Eggs and poultry are a relatively cheap source of protein. MHP is a prominent player in the world’s eggs and poultry marketplace.
We think that companies that do well when times are difficult will do even better when the economic environment that the company is operating within improves. By preparing itself to increase its sales to European Union countries in addition to maintaining and growing its current export business, we think MPH is well-positioned for future profits.
The default risk is MHP’s inability to perform. Given MHP’s increasing cash flow from operations, expansion into international markets, vertical integration, and increasing focus on higher-margin products, we think this risk is minimal relative to the return potential of the company’s bonds.
Much harder to quantify is the geopolitical risk. It is often hard enough to understand what goes in our own country, let alone the many factors involved in the political and economic processes of countries that have undergone as much change as the republics of the former Soviet Union. However, it is also important to take into account that whatever happens, people have to eat. In addition, companies can diversify to decrease geopolitical risks. MHP has facilities in Ukraine, both inside and outside of the Crimean peninsula. It has facilities in Russia, as well. A fluctuation of the Ukrainian hryvnia makes MHP’s products cheaper for consumers in the various other countries to which MHP exports, and especially to EU countries, which are MHP’s largest target market for expansion.
Note also that a company’s bond ratings are often constrained by the sovereign rating of the country in which it does business. In a recent article from Reuters, the Fitch ratings agency affirmed that “MHP’s ratings are constrained by Ukraine’s Country Celling of ‘CCC’, reflecting political and economic instability in the country. Any upgrade of the foreign currency IDR is contingent on an upgrade of Ukraine’s sovereign rating.” The same article goes on to say “At present we view MHP’s business and financial profile as commensurate with the mid-to high ‘B’ rating category, with no visible corporate governance issues, albeit constrained by the difficult operating environment in Ukraine.”
Another risk is relates to currency devaluation. Over the last two years, the Ukrainian hryvnia lost about 40% of its value against the US dollar. Currency devaluations can be a challenge for companies that rely on imports of raw materials. At the same time, they can be a great advantage to companies who wish to sell more exported product, and can thereby sell products that cost less in its target market.
We believe that these Mironivsky HilboProduct Yankee bonds have similar risks and maturities to other Yankees bonds such as the 10.76% Myria Agro bonds, the 8.8% Avangardco Holdings bonds, or the 9.6% Ferrexpo bonds, which we have reviewed previously on our Bond-Yields.com blog.
MHP has maintained its leadership position in its market, increased its cash flow from operations, and positioned itself for growth in exports to the European Union and around the world. Furthermore, it has accomplished this in a trying political and economic climate. We think that a company that can perform as well as MHP has in such difficult times should have little difficulty making good on this medium term note, as it is likely to perform even better when its economic environment improves. Consequently, we have chosen this high cash flow, high yield, 70 month Yankee bond offering about 10% yields for inclusion in our FX1 and FX2 global portfolios.
Issuer: Mironovsky Hilboproduct (MHP)
Maturity: April 2, 2020
Rating: CCC (Fitch)
Rank: Senior Unsecured
Yield to Maturity: ~10%
Disclosure: Durig Capital and certain clients may have positions in MHP 2020 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
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