August 4 (SeeNews) - Standard & Poor's (S&P) said it has affirmed the 'BB' rating of Bulgarian animal health products and feed additives manufacturer Huvepharma and removed it from CreditWatch, where the ratings agency placed it with positive implications on June 21.
Huvepharma's rating was confirmed and the company was removed from CreditWatch after it cancelled a planned initial public offering (IPO) on the Amsterdam Stock Exchange, the ratings agency said in a statement dated July 30.
S&P also said in the statement:
"The positive outlook reflects our expectation that the strong profitable growth momentum from 2020 will last. It also reflects our expectation that the company will establish a track record of maintaining adjusted net debt to EBITDA comfortably below 3.0x. In 2020 alone, Huvepharma launched 10 new products, including a new poultry feed additive product in Europe in August.
These launches led to strong underlying revenue growth of 10.4%, excluding negative foreign exchange effects. Margins expanded by 490 basis points to 27.1% on an S&P Global Ratings-adjusted basis. Sales of another feed additive in the U.S. cattle market, launched in fourth quarter (Q4) 2019, also gathered momentum. The company's strong performance continued into Q1 2021, with reported revenue growth of 11.2% and EBITDA margins reaching 30%.
We anticipate this trend will continue for the rest of the year, and project overall revenue growth of 11%-12% and adjusted EBITDA margin of 29.5%-30.5%. This should translate into positive free operating cash flows (FOCF) of around €40 million and adjusted net debt to EBITDA of 2.5x-2.6x (3.0x in 2020). We anticipate a potential further acceleration in revenue growth to 15%-16% and margins improving to 30%-31% in 2022, which should translate into further deleveraging to close to 2.0x-2.2x. This is within the company's medium-term financial policy target of 2.0x-2.5x in reported terms. December 2020 saw the approval of the first U.S. poultry vaccine that controls necrotic enteritis, a common bacterial disease in broilers. The penetration of this vaccine will likely help accelerate revenue growth in 2022. If the company achieved the abovementioned metrics, we would view them as supportive of a 'BB+' rating.
Earnings growth should offset risks from the partly-debt-funded capital investment program. Huvepharma's weak FOCF generation has weighed heavily on its credit profile over the past two years. It has invested considerable cash in production capacity expansion, particularly at its Bulgarian facilities. We anticipate an acceleration in capex once again to €110 million-€115 million in 2022 and 2023 (€95 million-€100 million expected in 2021), as the company finalizes its vaccine production capacity expansion. This will support its ambitious plans for this highest-growing product category in animal health.
Huvepharma is on course to complete a new vaccine production facility in Razgrad (Bulgaria) in 2021, its first outside the U.S. Earlier in the year, it also started construction of a new (third) facility in the U.S. That said, we think that the momentum of recent product launches and a good pipeline of new products--over 100 projects in the development phase--should enable the company to maintain positive FOCF.
Huvepharma has an established track record of strong organic revenue growth.In the past five years, Huvepharma has posted consistently higher revenue growth than most peers. About 90% of its revenue growth in the past 10 years has been organic, the rest through acquisitions. According to the company's estimates, 35% of its revenue growth in the last three years (2018-2020) came from new product launches, with 25% from products developed internally. We also view the company's focus on direct sales to customers (90% of total revenues) as a credit strength, as it promotes strong brand equity.
Huvepharma operates in a favorable end-market, with solid demand. The specialised external consultancy, Vetnosis, estimates the global livestock market (including poultry) at US$19.7 billion. It is expected to grow by around 5% (constant adjusted growth rate [CAGR]) between 2019-2024. Poultry--over 50% of Huvepharma's sales--is set to outpace the other animal categories, growing by 7.2% over the same period, primarily driven by the increase in global population and demand for protein. This is driving meat producers to invest in productivity measures, including feed additives and veterinary products, for disease protection.
The new poultry feed additive product launch in Europe in 2020 positions Huvepharma to challenge Elanco Animal Health Inc (Elanco; BB/Stable) in the region. Studies have shown Huvepharma's product posting some superior results compared to Elanco's, indicating better control of the prevalent coccidiosis disease in chicken. This has supported Huvepharma's product traction and strong market share gains since its launch.
Huvepharma is also well positioned to capitalize on growth opportunities outside poultry, notably in the large U.S. cattle market. Through the launch of the first generic monensin product approved in the U.S. in 2019, Huvepharma can now offer customers a strong bundled solutions package. This is enabling it to mount an effective challenge to the incumbent Elanco.
Recent investments should help sustain improved profitability.While Huvepharma's S&P Global Ratings-adjusted EBITDA margins have been volatile in recent years because of margin-dilutive acquisitions, we think the recent improvement will continue over the next 12-24 months. We forecast adjusted margins to cross the 30% threshold for the first time, which we view as above average for the sector. Among rated animal health peers, Huvepharma's margins are only trailing those of Zoetis Inc. (BBB/Stable/A-2), the world's largest animal health company. Huvepharma benefits from a balanced and highly integrated manufacturing footprint, which we think supports its competitive profitability. Following the completion of the fermentation capacity expansion at the Peshtera plant in 2019, the company now also satisfies 90% of its active pharmaceutical ingredients (APIs) consumption needs, which shields it from external market pricing volatility, and supports margin stability.
Huvepharma's business position reflects its concentrated asset base relative to peers in the animal health sector. With an overall revenue base of around €588 million, it is modest relative to rated peers such as Zoetis, Elanco, and Financiere Top Mendel SAS (Ceva; B/Stable). It is also less diversified in terms of end markets given that its products only cater to poultry and livestock, with no exposure to companion animals--a profitable market that also has positive growth prospects. Poultry-related sales account for over 50% of Huvepharma's sales, which we see as a high concentration relative to peers.
Huvepharma is also still in the early stages of vaccine development, projected to be the fastest growing product category.Vaccines are estimated to generate about US$9.7 billion in sales for the animal health industry. This is projected to grow by 5.6% CAGR between 2019 and 2024. Vaccines are seen as among the main replacements of antibiotics, which have come under increased scrutiny particularly in developed markets (the U.S. and Europe) where both consumers and regulators seek alternative solutions to overall animal health and disease prevention. Huvepharma has set an ambitious target for its vaccines business to grow its revenues share to 10% in the next five years, from our current estimation of less than 4%. This should help it reduce its exposure to antibiotics (just below 30% of total revenues). While vaccines reportedly account for about 30% of Huvepharma's development-stage pipeline projects, which is promising, we see potential delays and overall execution risks given the complexities involved.
The positive outlook reflects that we could raise the rating on Huvepharma to 'BB+' in the next 12-18 months if the current strong profitable growth momentum lasts, and translates into improved debt protection metrics. This would be supported by ongoing strong sales growth from recent and new feed additive and veterinary product launches.
We could upgrade Huvepharma if it performs in line with our base case, such that S&P Global Ratings-adjusted EBITDA margins improve sustainably toward 30%, thereby supporting positive FOCF and adjusted net debt to EBITDA comfortably around 2x-3x. An upgrade is also contingent on a clear capital investment program and the shareholders' commitment to maintain credit metrics at these levels.
We could revise the outlook to stable if Huvepharma's operating performance deviated from our base-case, with weak FOCF or adjusted net debt to EBITDA at 3x or above on a sustained basis. This could be caused by operating setbacks with the investment projects, a surge in competition, or delays in obtaining approvals for new product launches."