In this file:
∑ Fitch: WH Groupís Share Buyback May Reduce Rating Headroom, But Deleveraging Expected
∑ Reuters: WH Group gives back the bacon
Non-Rating Action Commentary
WH Groupís Share Buyback May Reduce Rating Headroom, But Deleveraging Expected
Source: Fitch Ratings
07 Jun, 2021
Fitch Ratings-Shanghai/Hong Kong-07 June 2021: Chinese pork producer WH Group Limited's (BBB+/Stable) share buyback plan may put pressure on the companyís leverage and reduce its rating headroom, says Fitch Ratings. However, the agency believes the companyís ratings continue to be supported by its sizeable and diversified operational cash flow from China, US and Europe, and record of deleveraging.
WH Group announced on 7 June 2021 that it plans to repurchase up to around USD2 billion of shares in 2H21, pending shareholder approval. The company will finance the buyback with cash and long-term bank loans. Fitch estimates that the buyback will raise the companyís FFO net leverage, although it will stay below 2x in 2021 (2020: 0.1x), the level above which we would consider taking negative rating action.
We also expect the company to deleverage in the medium term, driven by strong operating performance from its subsidiaries Henan Shuanghui Investment & Development Co., Ltd and Smithfield Foods, Inc. (BBB/Stable). The company has a proven record of deleveraging following the acquisition of Smithfield Foods in 2013. WH Group also has flexibility in its dividend policy, with its committed pay-out rate at 30% (2020: 40%).
WH Groupís performance remained resilient in 2020 and 1Q21, benefitting from its geographical diversification. WH Groupís China business remained robust with operating profit of USD1.14 billion in 2020 (2019: USD0.96 billion), due to its flexible inventory management, price adjustment and cost control. These strong results are in spite of operating challenges, such as a high hog price and supply shortage amid an outbreak of African swine fever. We expect the company to benefit from a lower hog price from 2021, as Chinaís hog supply recovers.
The profitable Chinese operation more than offset the temporary Covid-19 related costs of over USD800 million at Smithfield Foods. Smithfield Foods incurred lower-than-expected Covid-19 related costs of around USD40 million in 1Q21, but continues to face challenges from high feed costs, smaller spread between hog and pork value and labour retention in US.
WH Groupís free cash flow (FCF) could turn negative temporarily in 2021 due to high capex, but we expect FCF to return to positive afterwards. WH Group plans to increase its capex for 2021 to USD1.4 billion (2020: USD551 million) for facility upgrade and expansion, and diversification of business lines and proteins. The China operation will account for over two thirds of the total budget and leverage headroom is sufficient during this expansionary phase after receiving proceeds from Shuanghui's CNY7 billion equity placement in October 2020.
+86 21 6898 7976
Fitch Ratings (Beijing) Limited Shanghai Branch
3401, 34/F, Shanghai Tower
No.479, Lujiazuihuan Road, Shanghai, 200120
+852 2263 9967
Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: email@example.com
Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: firstname.lastname@example.org
Additional information is available on www.fitchratings.com
Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.The information in this report is provided \'as is\' without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US,000 to US,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US,000 to US,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the \'NRSRO\'). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the \'non-NRSROs\') and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.
WH Group gives back the bacon
Jun 6, 2021
Sino-U.S. pork producer WH Group (0288.HK) has launched a buyback of up to $1.9 billion, or 13% of its market value because it has excess equity. While returning unwanted money is a key reason for buybacks in the West, such blunt pragmatism is rarer in Asia where cash hoards abound. Perhaps it is American influence: the company was formed by the takeover of Smithfield Foods by Chinaís Shuanghui in 2013, and the enlarged entity subsequently listed in Hong Kong.
WH Group was battling African swine fever before the pandemic took its toll, knocking its valuation to a subdued average 10 times forecast earnings in the past two years. With last yearís EBITDA more than twice net debt, it...
more, including links