Each week we screen thousands of corporate bond listings to find what we believe is currently the best corporate bond for investors needing or seeking higher yields with the least amount of risk possible relative to its projected return. This week, we look at short 3 1/4 year Yankee bonds (in US dollars) from Mriya Agro Holding, a profitable agricultural company which operates in the Ukraine. Although the over 10.5% yields currently indicated with this bond only carries a B rating from Standard & Poor's, the following review shows why we see these 40 month high yield notes are a savvy bet to both increase cash flow and preserve wealth. We also believe this debt instrument offers sound diversification away from the financial services sector of the global economy and that it makes a good addition to our client's high yielding foreign and global fixed income investments.
Assessing the Yield Curve
Although we have communicated it many times previously, it bears repeating that wealth preservation by achieving returns that can outpace moderately rising inflation is one of the biggest concerns among our clients and other fixed income investors. It appears one of the few things in Washington garnering bipartisan support from our politicians and gaining momentum is the further tweaking of the way government measures inflation so it results in smaller annual increases in Social Security payments, governments pensions and veteran's benefits. Over time, fewer people would be eligible for antipoverty programs like Medicaid, Head Start, food stamps, school lunches and home heating assistance because annual adjustments to the poverty level would be smaller, leaving fewer people under the official poverty line. All told the savings become substantial over time, adding up to about $299 billion over the next decade, according to congressional estimates.
Also included in this change would be smaller annual adjustments to income tax brackets, which eventually pushes more people into higher income tax brackets. Given the proper perspective of who or what benefits the most from these cost of living index changes, suffice it to say that anyone who naively thinks or believes this change won't happen, or that it is honestly intended to be a more "realistic" reflection of the average person's cost of living increases, probably also think we all live in (or are well on our way towards) the land of Shangra-La.
Regardless of who or what agency considers inflation to be hovering near 2% or not, not everyone is buying into the story that there is barely any inflation right now. Achieving yields high enough to preserve one's wealth and outpace inflation has become much more complicated than only assimilating as little risk as possible in order to achieve rewards that are marginally higher than the government's own "official" inflation index. In order to better comprehend these masked instruments of wealth destruction, a more astute and personal assessment must be made of the combined effects of inflation, the debasement and devaluation of the dollar, and sadly enough, a government and its economists fixated on obfuscating a plain or clear view of any of the above.
Perhaps the more complicated, confusing and distressing these matters can seem or become, the more necessary and highly rewarded its perpetrators become. However, we endeavor to simply this concern for wealth preservation by finding the highest yields possible in shorter maturity, high yielding fixed income investments that are able to meet or exceed our strict criteria for evaluating debt issuers, as outlined below.
A look at the issuer
Mriya Agro Holding is one of the largest and most efficient agricultural producers in the Ukraine. The Company was founded in 1992 as a family business with the dream (mriya translates to "dream" in Ukrainian) to create a leading and responsible agricultural business committed to grow and supply the best produce. Mriya has grown dramatically and has expanded its farmland from 50 hectares in 1992 to 298,000 hectares today. Mriya's land is concentrated in Western Ukraine where "black earth" is among the most fertile lands in the world. Mriya cultivates a diverse range of agricultural crops including wheat, rapeseed, corn, sugar beet, potatoes, buckwheat, barley, peas and soybeans, taking full advantage of the fertile land it owns to meet the vital and growing global demand for food. Mriya's produce is sold in over 20 countries around the world, supplying the largest food companies in Europe.
In its 20 years of existence, Mriya has deployed successful farming methods consistently across its farmland based on international expertise and through continuous productivity enhancements. The Company started investments in modern agricultural machinery in 1996, purchasing the first machinery produced by John Deere (DE) and Grimme, and in 1999 formed a strategic partnership with Ukrainska Mova, which was later acquired by Kraft (KRFT), to supply potatoes for potato chip production. The Company currently benefits from a vertically integrated structure which enables it to manage the entire farming value chain efficiently — from seed production, crop planning and cultivation to storage and transportation infrastructure and logistics. The Company owns silos, granaries and seed storage facilities, potato warehouses, seed plants, and operates a large fleet of GPS-equipped transport and agricultural machinery. These significant operating efficiencies, when combined with crop yields substantially above the Ukrainian average and their low labor and farm lease costs, help to explain the strong growth over the last 5 years of Mriya's earnings (EBITA).
Since 2008, 20% of the outstanding shares of Mriya have been listed on the Frankfurt Stock Exchange in the form of GDR's, and 80% of the shares are retained in the ownership of the founding Guta family. The Company is headquartered in the Ternopil region of the Ukraine, and all of the lands under management is located within 150 kilometer radius of its headquarters. Mriya Agro Holding is incorporated in Cyprus, and currently employees over 3360 administrative and full time production staff, and about 2000 seasonal production staff.
We like companies that are profitable
Agriculture product prices have substantially outpaced worldwide inflation in the last 5 years, resulting in a significant growth in revenues for Mriya. Earnings before interest, taxes, depreciation and amortization (EBITDA) grew 17% in 2011 versus 2010, and in the 12 month period from Q3 2011 to Q3 2012 has risen another 48% to $235.6 million. Historically the 4th quarter, where much of the previously harvested crops are sold and operational costs decrease, has the strongest earnings. In the first nine months of 2012, EBITDA was increased to $194.7 million on revenues of $410.5 million compared to earnings of $146.7 million and revenues of $251.4 million for the same period of 2011. Total assets have surged by 35% year of year to over $1.3 billion.
Mriya's application of modern equipment and best of class food science to rich, low cost soils and inexpensive labor has resulted in such strong revenue growth and robust margins that analysts are forecasting that 2012 revenues may rise over 40% from the previous fiscal year to $600-640 million with earnings (EBITDA) increasing over 27% to $240-245 million.
Interest Coverage Ratios
Mriya's financial debt for the first 9 month reporting period of 2012 totaled $441.5 million at a weighted average interest rate of 10.0%. With the same 9 month EBITDA reported at $194.7 million, earnings appear to be about 4.4 times greater than interest expenses and moving higher.
We like companies with lower debt to cash ratio
Mriya's total financial debt at the end of Q3 2012 was $407 million, the major part of which is in US dollars, while cash and short term deposits were $82.9 million. The cash position is lower than the same period in 2011 as the previous year held significant amounts of unused money from Eurobond proceeds, which was slated for capital investments in new heavy equipment and additional land leases. Mriya is one of the few operators in the rich farmlands of the Ukraine to achieve large economies of scale using GPS and world class equipment, such as the 20 new S680 John Deere rotary combines it purchased this year. Given the current higher trajectory of agricultural product prices, Mriya's continued rapid expansion and high margins model seems likely to continue. However, if it were to throttle back to a more modest growth rate with less capital investment, its strong EBITDA would enable them to pay down debt aggressively if that were to become a primary use of cash flow.
We like companies that have good balance sheets
The total market capitalization of Mira is estimated at approximately $800 million, which is about twice that value it appears it may have been in 2008 when it was first listed on the Frankfurt exchange. As a result of heavy institutional ownership, its shares don't appear to be traded with any significant volume. However, with a debt of only 407 million and a conservative debt to equity ratio of only 33%, a company sporting such high margins of profitability and strong growth in cash flow should have little difficulty in accessing additional capital through the equity markets if it were deemed necessary or desirable.
We like higher yields
This five year $250 million US dollar denominated debt of Mriya was issued in March of 2011 at the coupon rate of 10.95%, payable semi-annually. While its principal amount is callable at a rather modest premium (or no premium, if a specific favorable tax treaty outside the direct control of Mriya changes), we see this as allowing prudent flexibility should it need to unexpectedly change its current business model and pay down its debt. Acquiring this bond at or near par would result in indicated yield to maturity in 2016 over 10.5%, and provide added strength to the high cash flow in our client's foreign and world fixed income holdings.
The default risk is Mriya Agro's ability to perform. Considering their historical and recent performance, their flexible balance sheet, their sound cash position, and the excellent cash flow that is projected to service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond is minimal relative to its more favorable return potential.
The hardest risk for us to identify is the geopolitical risk. Since we find it hard to understand many of the political changes even in our own country, perhaps the uncertainties of changes on a foreign soil become less formidable. With that said, it is our opinion that diversification into other forms often serves to reduce risk. Our strategy here, as with other Yankee bonds, is to focus on unique or required services that can be seen as a adding key economic value to the society it's associated with. Mriya's food production is a basic need for any society, and it is highly regarded as one of the best operators in its homeland.
Mryia is relatively small compared to farming, processing and storage companies, such as Archer Daniels Midland (AMD), Bunge (BG), and Anderson (ANDE). As such, it may face increasing competition from substantially larger and better financed companies attempting to gain better global positioning for food production.
The cost of crops is directly affected by trends in the international and domestic prices, as well as by the exchange rate of the Ukrainian hryvna. Fluctuations in the price of fertilizer are also is unpredictable, but an expanded diversified crops and Mriya's low cost to produce product should help alleviate some of these uncertainties going forward.
We believe that these Mriya bonds have similar risks and maturities to other Yankees bonds such as Bio PAPPEL (DURQ), Vedanta Resources (VDNRF), or Georgian Railway, which we have reviewed previously on our Bond-Yields.com blog.
Summary and Conclusion
It is our opinion that Mriya Agro has positioned itself well for the future as a leading global provider of food in one of Europe's richest farming districts. It has a fair cash position, excellent earnings and interest expense coverage, and a greatly improving balance sheet. As a result, we believe these Mriya bonds offer an extremely high yield relative to the financial risks that we can identify, and have chosen them for addition to our Foreign and World Fixed Income holdings.
Issuer: Mriya Agro Holding
Yield to Maturity: 10.57 %
Disclosure: Durig Capital and certain clients may have positions in Mriya Agro 2016 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.
To know more about this Myria Agro bond call our fixed income specialist at 971-327-8847