McPherson’s (MCP) has reset to a lower AUD environment, and improved profitability by refocusing towards higher margin businesses. Free cashflow generation has reduced net debt by 27% year on year. While top line results are weaker than expectations, credit metrics are broadly in line given the debt reduction. Source: Company reports, FIIG Securities
- Total sales revenue decreased by 10.6% from $312.6m to $279.5m (FIIG forecast: $320.1m) and EBITDA decreased 3.6% from $28.5m to $27.5m (FIIG forecast: $29.1m). Revenues were lower than expected due to the closure of the unprofitable Impulse Merchandising Division and declines in low margin private label and agency revenues
- Underlying profit before tax was $19.7m (FY16: $18.7m). The statutory loss after tax was $9.1m (FY16: $11.0m profit) primarily due to previously announced non-cash impairment of intangible assets totalling $21.6m
- Underlying EBITDA margins improved to 9.8% (FY16: 9.1%) as the company exited low margin and non-profitable businesses
- Improved working capital efficiency led to a strong operating cash flow with cash conversion of 113%. Consequently, net debt reduced by 27% to $36.8m at 30 June 2017 (FYE16: $51m). Net debt to underlying EBITDA reduced to 1.3x at 30 June 2017 (FYE16: 1.8x). The company reiterated its target leverage of around 1.0x. Given the significant debt reduction, credit metrics are broadly in line with FIIG expectations
- During the year, MCP redeemed or bought back $25m of bonds stating that redemptions would likely continue. There is currently $25m of bonds outstanding. Other than free cashflow generation, the group has utilised its secured bank facility to repurchase the bonds as a cheaper source of funding
Relative value Source: FIIG Securities, Bloomberg. Pricing accurate as at 25 August 2017
The above table gives trading margins to worst for similar AUD unrated bonds.
MCP has improved its credit profile and now has a leverage ratio around its target range. In our opinion, further significant credit improvement is therefore unlikely in the near term.. We believe MCP will likely reinvest free cashflow back into the business rather than to further significant debt reduction. With limited further potential upside, we expect the bonds will underperform compared to its peers.
Source: FIIG Securities, Bloomberg. Pricing accurate as at 25 August 2017