MHP MHPC LI
September 17, 2018 - 5:20pm EST by
perea
2018 2019
Price: 12.05 EPS 0 0
Shares Out. (in M): 107 P/E 0 0
Market Cap (in $M): 1,290 P/FCF 0 0
Net Debt (in $M): 1,000 EBIT 0 0
TEV ($): 2,290 TEV/EBIT 0 0

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  • Ukraine
 

Description

Thesis

MHP is the largest poultry producer in Ukraine and one of the world’s low-cost producers (depending on exchange rates, at times the lowest-cost producer). The company is vertically-integrated, led by a talented and aligned management team, has Western-style corporate governance, and is serving a growing share of global exports. MHP has a market cap of only $1.3b, despite generating $250-300m of annual free cash flow which is being re-invested at very attractive returns. The company also has a dividend yield greater than 6%.

History and management

In 1998, current CEO Yuriy Kosyuk purchased a number of grain elevator silos out of bankruptcy and founded MHP as a grain trader following the collapse of the USSR. MHP had also acquired a feed mill and began to supply feed to Peremoga poultry farm. In 1999, the farm defaulted on its payment and MHP acquired Peremoga through bankruptcy, beginning to produce chicken meat and export grain. In 2000, the company decided to focus more on poultry production, which at the time was an unpopular decision given how lucrative grain trading was (evidenced by the entry of such companies as Glencore and Louis Dreyfus). In 2002, MHP launched its Nasha Riaba brand of chicken – the most popular brand in Ukraine. In 2003, MHP was the first Ukrainian company to receive a loan from the IFC. In 2006, MHP raised a $250m bond and in 2008 filed for an IPO and became listed in London as a GDR.

Relative to Ukraine’s youth as a country, MHP has a long history with the capital markets. Investors can review financials since 2003 (from the 2006 issuance of 2011 maturity bonds) and follow the evolution of the company’s growth and governance. CEO Yuriy Kosyuk is a very talented leader and has a ROIC-driven capital allocation philosophy. Upon his request, a Western style board of directors was formed and has historically been independent. With the recent addition of Roberto Banfi to the board (formerly from Brazil Foods and now a consultant for MHP), the board is technically not independent. The former Chairman of the board was Charles Adriaenssen from InBev, and the Chairman since 2016 has been John Rich – an expert in poultry and agriculture that has consulted extensively for the IFC.

MHP has been the only Ukrainian issuer to have honored all its financial obligations throughout its history, including during the economic and geopolitical crisis in 2014-2016 (during which time, MHP continued paying its dividend). The company’s largest shareholder is Kosyuk with nearly 70% of the shares, followed by Prosperity, a highly successful Russia and FSU-focused fund, with over 10% of the shares.

Background

Poultry is the low-cost protein. As a general heuristic, it requires 2 kg of feed to generate 1 kg of chicken, 4 kg of feed to generate 1 kg of pork, and 6kg of feed to generate 1 kg of beef. In addition, poultry requires the least amount of time to raise as well as the least capital (e.g., cows need to graze on larger plots of land). Given its low costs and health benefits, poultry has been gaining share among proteins. Around the year 2000, global poultry consumption overtook beef and in the near future it will also overtake pork. Given the price/demand function, one would expect pork to fall between poultry and beef, but the Chinese skew the equation. China accounts for around 11-12% of global poultry and beef consumption but around 50% of global pork consumption.

Ukrainian poultry production has soared in the past two decades. The majority of the growth has been from MHP and off a non-existent base. Global production between 2000-2016 has grown 1.6x whereas Ukrainian production has increased 50x, and the majority of production has been consumed internally. With a population of 45 million, protein consumption is 2.3 million tonnes (2001: 29kg/capita, 2016: 52kg/capita), of which 1.1 million tonnes is poultry (2001: 6kg/capita, 2016: 24kg/capita). Ukraine’s 52kg/capita poultry consumption is on the low-end compared to other countries (Russia 62kg, EU 76kg, Brazil 96kg, US 113kg).

Competition

MHP has significantly increased its capacity in the past decade.

It has also significantly increased its market share. In 2006, the company had ~35% share of production compared to Agromars at around 22%. In 2016, the company has nearly 60% compared to Agromars ~10%.

Unlike the typical poultry company, which sends the feed and chicks to third-party farmers who will grow the chickens until they are picked up again and taken to the slaughterhouse, MHP is unique in its vertical integration given the cost advantages it has in Ukraine. The company has nearly 1m acres of farmland on which it generates approximately 2m tonnes of grain, making it 100% self-sufficient in corn, 60% in soybean/wheat, and 25% in sunflower. It produces sunflower protein and fodder, raises parent stock, hatches the eggs, raises the chickens, processes them, then distributes them. Domestically, a third of the chicken is sold through its franchise network of 2,000 retail stores.

MHP has several competitive advantages:

  1. Ukrainian soil, which has 25% of the world’s chernozem or “black soil”

  2. Use of sunflower protein in addition to soybean protein in its fodder. Sunflower is around 20% cheaper than soybean, and the sunflower seeds can be processed into sunflower oil to be sold for additional revenues.

  3. Lower labor costs (Brazil is 1.5x and USA is 7x)

  4. Lower land costs (Brazil is 3x and USA is 10x)

  5. Lower transportation costs (300km average distance to ports vs. 900km Brazil and 1,500km USA)

  6. Captive customers (Nasha Riaba chicken is priced 5-10% higher than competitors)

  7. Economies of scale in production, distribution, etc.

These competitive advantages lead to among the lowest production costs globally. I have adapted the following (a few months ago) from a study on global production costs produced by Wageningen University & Research (“Competitiveness of the EU sector”). The recent decline in the Brazilian real likely implies that the advantage has reverted to the Brazilians but the difference is not great. On the poultry side, the composition of costs is roughly: 40%-50% grains, 15% protein, salaries 13%, utilities 15-17%, and the remainder packaging. On the grain side: 20-25% fertilizer, 15% seeds, 12% fuel, 12% plant protection, 13% salaries, leases 15%.

 

These production costs lead to the highest margins in the industry. The difference compared to competitors is primarily due to growing own feed and raising own chickens and selling sunflower oil, followed by land and labor cost advantages, and finally government subsidies that are being phased out. At the same time, as a vertically-integrated company MHP is a lot more capital intensive, so from a return on capital perspective the difference is less drastic.