Avangardco EBITDA falls 47% yoy, net debt rises 13% YTD in 9M14 .

Обзоры по компаниям и отраслям 28.11.2014 Ukraine’s leading egg producer Avangardco (AVGR LI, AVINPU) reported a 24% yoy decline in net revenue to USD 355 mln in 9M14, according to its LSE filing on Nov. 28. The company attributed the decline to lower prices in USD terms for its core products, shell eggs, owing to sharp devaluation of the Ukrainian currency in 2014 (its shell egg output was flat yoy in 9M14). The company also reported it had to close two factories in the war-afflicted areas of the Donetsk and Luhansk regions, which used to have 3 mln laying hens, or 11% of the company’s total laying hen flock at the beginning of the year. The company’s EBITDA plunged 47% yoy to USD 109 mln, and its EBITDA margin fell to 31% in 9M14 (from 44% in 9M13). It attributed the decrease of its profitability to “an increase of certain cost components”. Its EBITDA matched USD 109 mln in cash flow from operations before working capital changes, which fell 38% yoy. Avangardco’s bottom line fell to USD -5.7 mln in 9M14, compared to a positive result of USD 162 mln in 9M13 and positive USD 52 mln in 1H14. The core drivers for the negative results were USD 26 mln in a one-off impairment of non-current assets (related to the closure of the two factories in the war-torn areas) and USD 49 mln in exchange losses. The company’s cash flow from operations dropped 71% yoy to USD 41 mln in 9M14, and its cash outflow for investments also decreased significantly: -70% yoy to USD 55 mln. Its end-3Q14 total debt stood at USD 345 mln (up 7% YTD) and cash balance stood at USD 158 mln (flat YTD but 33% lower qoq). With this result, Avangardco’s net debt increased 13% YTD and 77% qoq to USD 188 mln. In its outlook, Avangardco reported that its egg production will decrease yoy in 2014, while it expects the prices of its shell eggs in Ukraine will continue to increase in the last quarter of the year. The company named further diversification of its export markets to be among its core tasks for the near future. Alexander Paraschiy: After the company reported weak operating results for 3Q14, there is little surprise in this latest report of poor financials. Its 3Q14 figures, which can be derived from its 9M financials, look especially weak: revenue decreased 43% yoy to USD 92 mln, EBITDA fell 58% yoy to USD 30 mln and its bottom line reached USD -58 mln. The core reason for Avangardco’s 3Q14 yoy decline in EBITDA was zero reported income from government support (vs. USD 11 mln in 3Q13) and zero IAS 41 gains (USD 9 mln in 3Q13). The company earlier reported to us that it received government support in excess during 1H14, and they expected it to decline in 3Q14; nonetheless, the extent of the radical decline is a surprise to us. Also disturbing is a radical decline in the company’s cash balance, which stood at USD 236 mln as of the end of June 2014. Then, Avangardco’s cash covered 90% of the repayment of all of its short-term debt and USD 200 mln in Eurobonds outstanding (maturing in October 2015). Now its cash covers these repayments by just 60% (not accounting for USD 30 mln in dividends that it has to pay). Nonetheless, we believe the company will return to showing positive free cash flow in the following quarters, as soon as it renews receiving government compensation in a normal way and will continue to decrease its capital expenditures. Though, note that the core risk for Avangardco’s repayment of its Eurobond is not its own balance sheet (which still looks strong) but the balance sheet of its parent Ukrlandfarming. The YTM of Avangardco’s bond (AVINPU) surged to a historical high of 27% compared to its 9% historical average, and its spread-to-sovereign widened from an average of 500 bps to 1761 bps, reflecting the bond’s increased restructuring risk. Given Avangardco’s 9M14 financial results, we project its full year 2014 EBITDA at USD 126 mln (-58% yoy), which would result in a forward EV/EBITDA multiple of 4.3x, which is higher than the 3.2x average observed in 2013-2014.