October 9, 2017 / 8:22 AM / 15 days ago

Fitch Affirms WH Group at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, October 09 (Fitch) Fitch Ratings has affirmed China-based pork processor WH Group Limited's (WH Group) Long-Term Foreign-Currency Issuer Default Rating (IDR) and its senior unsecured rating at 'BBB+'. The Outlook for the IDR is Stable. WH Group's ratings are supported by the company's leading market position in both China and the U.S., stable and growing demand for pork and pork products, as well as the geographical diversification and synergies between the U.S. and China operations. WH Group's ratings are also supported by its healthy financial profile, as the company has reduced its leverage over the past few years. However, the ratings are constrained by the cyclicality and lower margins of the protein industry and the limited product diversification. KEY RATING DRIVERS Solid Financial Results: Fitch expects stable operating results after the company reported an improvement in EBITDA margin in 2016 to 10.6% (+0.6pp yoy), which was sustained in 1H17 at 10.7%. There was some slight weakness in the China business due to adjustments in its product offerings and rising hog prices, but this was more than offset by strong results in the US operations. Strong demand for American pork exports in addition to more streamlined operations contributed to the improved profitability in the US business. Strong, Stable Demand: Pork and pork products tend to enjoy stable demand with limited sensitivity to economic cycles. In addition, China's per capita meat and pork consumption is only half of that in Hong Kong and the US, suggesting further room for demand to increase with rising income levels. To further strengthen its market position, the company acquired stakes in two companies in 2017. Clougherty is an integrated producer and processor of pork products in the U.S., which would allow WH Group entry into the U.S. West Coast market through its leading bacon and fresh sausage brand Farmer John, and Pini is a hog slaughterhouse in Poland, which would strengthen the company's vertically integrated supply chain in Europe. Healthy Financial Profile: WH Group has substantially cut leverage over the past three years due to strong free cash flow (FCF) generation and a 2014 IPO. FFO adjusted net leverage fell further to 1.3x in 2016 from 1.9x in 2015 and Fitch expects it to fall to 1.0x by end-2018. Fitch expects FCF generation to remain strong, with low capex requirements and assuming a dividend payout ratio of 40%. Sector Exposure Constrains Ratings: WH Group's ratings are constrained by the protein industry's cyclicality and lower margins. Single protein exposure also constrains the rating at the current level even though the company is diversified across different countries. DERIVATION SUMMARY WH Group's ratings are supported by its leading market position, large operating scale and strong financial profile, but constrained by the cyclical nature of the protein business. Tyson Foods, Inc. (BBB/Stable) is the closest comparable peer. Both companies are major protein producers and have leading market shares. Compared with Tyson Foods, WH Group has better geographical diversification, stronger margins and lower leverage, which justify the one-notch differential. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: - 6% revenue decline in 2017 and 2% growth from 2018 in China; 7% revenue growth in 2017 and 4% growth from 2018 in the US - 10% EBITDA margin in 2017-2020 - Capex of USD500 million per year - 40% dividend payout ratio RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: - No positive rating action is envisaged until the company significantly diversifies its products and/or geographical markets. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO adjusted net leverage sustained above 2x (2016: 1.3x) - FCF margin sustained below 2% (2016: 3.3%) - EBITDA margin sustained below 8% (2016: 10.6%) - Sustained decline in revenue or market share in key markets LIQUIDITY Ample Liquidity: WH Group had over USD1.1 billion in cash and USD2.8 billion in undrawn banking facilities, which is more than sufficient to cover its current borrowings of USD1.0 billion. Contact: Primary Analyst Yee Man Chin Director +852 2263 9696 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Cathy Chao Associate Director +852 2263 9967 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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