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Monitoring bond issuer developments (3)

In the third article reviewing the financial metrics across the corporate bond market, the two companies operating in the food and beverage sector rank among the strongest bond issuers on the Malta Stock Exchange.

In August 2017, Simonds Farsons Cisk plc launched a €20 million bond (the fourth bond issue in its long-standing history) mainly earmarked for the refinancing of the outstanding €15 million bonds which were redeemed at the first optional repayment date of September 13, 2017. The financial year of Farsons comes to an end on January 31 and the group registered another record performance during the last financial year.

While revenues increased by 2.4 per cent to €88.1 million, Ebdita surged by 10.8 per cent to €19.3 million giving a very strong interest cover of 13.1 times. Moreover, despite the relatively high capital expenditure requirements associated with the industry, the gearing ratio stood at only 22.6 per cent as at 31 January 2017.

The Farsons Group also boasts of a very low net debt to Ebdita multiple of just 1.8 times as at January 31, 2017. This implies that the group can repay its overall level of debt in under two years, assuming that the underlying operational profitability is sustained. This is also a very strong ratio even when compared to large multinational companies.

The Financial Analysis Summary annexed to the Prospectus dated July 31, 2017 provides the financial forecasts for the current financial year ending January 31, 2018. The Prospectus also included a pro-forma set of financial statements for the financial year ended January 31, 2017 since Farsons was expecting to complete the spin-off of its property division by the end of 2017 into a separate company listed on the Malta Stock Exchange. Unfortunately, following the unexpected and surprising decision by the board of the Planning Authority, this will not take place for the time being as Farsons confirmed that the spin-off process has been put into abeyance.

Farsons was estimating a 3.4 per cent growth in revenues to yet another record of €91.1 million for the 2017/2018 financial year while Ebdita is anticipated to reach €19.2 million, representing an increase of 3.3 per cent compared to the pro-forma Ebdita of €18.6 million during FY2016/2017. Based on these figures, the interest cover is expected to improve even further to reach 15.2 times in FY2017/2018.

Although the gearing ratio is expected to increase to 34.4 per cent by the end of the current financial year ending January 31, 2018 (reflecting additional debt taken on for the injection of €6.52 million into Trident for the purpose of part-financing the development costs related to the Brewery Façade as well as for part-financing the €15.5 million capital investment projects which are either close to completion or are committed to be undertaken in the near term), this is still considered to be on the low side and highly sustainable given the group’s strong cash-generation capabilities. Although the net debt to Ebdita multiple is envisaged to deteriorate to 2.5 times in FY2017/2018, it remains one of the strongest among local corporate bond issuers.

Premier Capital plc is the development licensee for the US-based fast-food giant McDonald’s Corporation in the Baltics (Estonia, Latvia and Lithuania), Romania, Greece and Malta. As at June 30, 2017, Premier Capital operated 134 restaurants of which 68 are situated in Romania, 33 in the Baltics, 24 in Greece, while the remaining nine are in Malta.

Premier Capital should be a serious contender for an equity listing

In October 2016 Premier Capital approached the bond market for the second time with a €65 million 10-year issue. The acquisition of McDonald’s Romania late in January 2016 led to a complete transformation of the financial performance of Premier Capital. In fact, from a company which generated an average annual Ebdita of €10 million in 2014 and 2015, Ebdita increased more than threefold to reach €32.7 million during the financial year ended December 31, 2016 with McDonald’s Romania accounting for 55.2 per cent of aggregate revenues, 65.2 per cent of total Ebdita and 75 per cent of overall pre-tax profits.

In essence, although Premier Capital has now become almost entirely dependent on the performance of its Romanian subsidiary, this acquisition has strengthened the overall group in a notable manner. The Ebdita margin jumped to 14.2 per cent in 2016 from 10.4 per cent in 2015, the interest cover improved to 6.9 times (2015: 4.6 times) and the net debt to Ebdita multiple almost halved to 1.8 times in 2016 from a level which was already comfortable at 3.2 times in 2015.

The Financial Analysis Summary dated June 21, 2017 indicates that Premier Capital expects to generate total revenue of €255.1 million during the current financial year to December 31, 2017 and an Ebdita of €35.7 million (representing an increase of 8.9 per cent). Should these financial estimates be achieved, the interest cover is anticipated to strengthen to 9.1 times and the net debt to Ebdita multiple should improve to 1.3 times. Overall net debt is expected to decrease from €59 million as at the end of 2016 to €47.5 million while shareholders’ funds are anticipated to improve from €41.6 million to €55.4 million. This will help the gearing ratio to improve as well to 60 per cent as at the end of 2017 from 74.5 per cent in 2016.

While this may be considered to be high when compared to Farsons as well as other bond issuers in different sectors, the strong cash-generation capabilities of Premier Capital should not be overlooked. Should the group maintain such a strong level of Ebdita in the years ahead and assuming most of the profits generated are retained and not distributed to shareholders, the gearing ratio should fall to well below 50 per cent in the coming years.

Given Premier Capital’s strong financial performance and credit metrics coupled with other important strengths such as the relationship and considerable power of the McDonald’s brand worldwide, Premier Capital should be a serious contender for an equity listing. Maltese equity investors need to be given added opportunities to gain exposure to certain local companies that are expanding overseas in a very successful manner.

Meanwhile, following the surprising decision in recent weeks, all investors should hope that the necessary planning approvals are eventually granted to Farsons and the spin-off of Trident Estates materialises in the not too distant future. The level of sophistication across the local capital market needs to improve and corporate actions such as spin-offs and share buybacks are indeed necessary to generate more widespread interest for locally-listed securities.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd (Rizzo Farrugia) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2017 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

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