Thu 05/19/2022 11:25 AM
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St Hubert analysis from Reorg's EMEA Middle Market team.

Investment funds and advisors are monitoring the French margarine business St Hubert as the rise of raw material prices are weighing on the Fosun-backed company’s performance, sources told Reorg.

The company generated a YTD March EBITDA of about €7 million, down 20% compared with about €8.7 million a year earlier. On an LTM basis as of March, the group generated about €28 million in EBITDA, sources told Reorg.

The company had about €110 million of revenue and €39 million of EBITDA at the end of 2020, sources added.

Revenue also slipped to €25 million in the YTD March period compared with €27.6 million a year earlier. The cash position at the end of March was about €38 million.

St Hubert will find it a challenge passing on increased raw material costs, especially in the second half of the year, when consumer spending may contract because of accelerating inflation as a result of the war in Ukraine. Key raw materials for margarine producers are edible oils such as sunflower oil, rapeseed oil, soybean oil and palm oil.

According to sources, some of the company’s €260 million term loan traded in the high 80s before Russia’s invasion of Ukraine. The loan is currently quoted in the low 80s.

Together Ukraine and Russia account for more than 75% of all sunflower oil exports, with Ukraine alone accounting for nearly 50%, according to IHS Markit. IHS Markit also states that the two countries combined have about a 15% market share of the world’s rapeseed oil trade. Further, both countries were among the top 10 producers of soybeans globally for the 2021/2022 season, according to World Agricultural Production.

The supply shock to sunflower oil markets caused by the Russian invasion of Ukraine has led to edible oil prices spiraling upwards and with the harvest season for edible oil producing crops not occurring until late autumn, there is little that can be done to alleviate supply constraints in the near term. However, prices of these raw materials were already rising before the conflict due to recent droughts in Paraguay affecting soybean oil production and pandemic-induced labor shortages in Malaysia affecting palm oil production, which relies heavily on migrant labor.

St Hubert’s comparable company Upfield has been passing through price increases with a positive effect on revenue despite volume declines since the second half of 2021. Upfield’s management stated on the group’s fourth-quarter call that it expects to pass through price increases of above 20% in the first half of the year. On April 1, when the group held its fourth-quarter earnings call, management stated it had been positively surprised by the inelasticity of the group’s products.

Further exacerbating supply issues is Indonesia’s recent ban on palm oil exports as Indonesian citizens were struggling to afford rising palm oil prices. Indonesia is the largest producer of palm oil globally, contributing around 59% of global output in 2021, according to the USDA. The second largest producer is Malaysia accounting for about 25% of global output. While the export ban is expected to be short-lived as Indonesia produces far more palm oil than it can consume domestically, it has worsened the current supply issues in edible oil markets placing further upward pressure on prices.

According to S&P, Jakarta has said that it will remove the ban when the domestic price of cooking oil goes below 14,000 rupiah per liter (96 cents/liter). The price as of May 9 was about IDR 17,000/liter.

Prices across the globe for edible oils have been reaching all-time highs this year. As the data from Trading Economics shows below, Malaysian palm oil futures have tripled in price from 2019 levels.

Financials and Inflation Worries

Already in 2020, the company’s financial performance was suffering from increasing competition as well as from some of the group’s products not being featured on supermarket buyers’ lists, sources said.

Some investors also expressed concern over the company’s lack of geographical diversification as most of its revenue comes from France.

St Hubert’s capital structure as of June 2021 consists mainly of €260 million term loan due January 2025 and a €10 million RCF due January 2024, sources said.

At that time, the company’s net debt amounted to €163 million, with a net leverage of 5x. Cash and cash equivalents amounted to about €45 million.

In France, St Hubert’s main market, prices rose 5.1% from a year ago in March - the most since the data series began in 1997. In Italy, another key market for the company, prices increased 7% in March from a year earlier - the fastest pace since 1991.

On May 16, Bank of England Governor Andrew Bailey warned about a “very real income shock” coming from energy prices and “apocalyptic” food prices resulting also from the conflict in Ukraine. The U.K.’s Office for National Statistics recorded inflation at 7% in March and later this week is expected to unveil over 8% inflation for last month. The Bank of England has said inflation is likely to peak at 10.25% during the final quarter of 2022.

In 2020, Chinese investment funds Fosun and Beijing Sanyuan Foods supported the company with an €8 million equity injection to help the company meet its maintenance leverage covenant of about 5x in March 2020.

The sponsors acquired the company from Montagu private equity in late 2017 for about €625 million, according to Reuters.

St Hubert sold about 33,000 tons of spreads, plant-based yogurts, creams and ready-made pastry dough in 2018.

--Luca Rossi, Garan Dhillon, Andrew Ross
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