LA Private

UMG holds still, awaits word from French suitor

Is United Malt Group (ASX:UMG) just going through the motions while it awaits its French bidder to finish due diligence and firm up a $5 a share offer?

The company released final interim results for the first half of 2022-23 – they were within the range of the trading update in late April but again there’s no dividend to be paid to shareholders.

That’s the second period in a row shareholders have been left empty-handed.

On top of that the company revealed a surge in debt and help from its banks which eased its loan covenants – and also said it didn’t think it would need to raise extra capital.

The latter remark would have come as a shock, but the mooted $5 a share bid from Malteries Soufflet SAS should be enough to calm nerves.

Indeed, the shares rose 2.3% yesterday to close at $4.45 in a sort of vote that the bid will take care of any problems.

“As the Company’s earnings profile improves, the Board expects to resume payment of dividends in line with United Malt’s policy to distribute approximately 60 per cent of Underlying Net Profit After Tax as dividends,” UMG said yesterday, though if the bid emerges, there will be no more dividends because the $5 a share offer will be quickly snapped up.

After the tough first half to March 31, directors were upbeat about the outlook, though, again, if the bid from French group eventuates, the second half won’t matter.

CEO Mark Palmquist said in Wednesday’s statement, “While the first quarter of FY23 included a continuation of the challenges experienced in the prior year, our financial performance improved markedly during the second quarter.

“Sales volumes started to recover, particularly towards the end of 2Q, which is consistent with the expected seasonal increase in malt demand as our customers build inventory for the northern hemisphere summer.

“As we indicated previously, our gross margins have also improved from the progressive implementation of enhanced pricing and commercial terms with our customers which came into effect from 1 January.

“We expect this rate of financial improvement to continue into the second half as our contracts better reflect our improved commercial terms. These contracts include more frequent freight price re-sets with inflation cost escalation more appropriately reflected in our processing fee.

“Our barley quality, price and supply are also secured for the remainder of the year.

“Taken together, these factors provide confidence in our ability to deliver projected improvements in gross margin and EBITDA in 2H23.”

The first half saw higher costs hurt the bottom line.

Group revenue rose 16% to $756.6 million, “primarily reflecting improved contract pricing and higher barley prices during the period.”

Underlying EBITDA (before costs and one-off items) was $52.7 million, up 1% on the prior corresponding period.

“Earnings improved materially in 2Q from an uplift in gross margin with realised improvements in commercial terms,” directors said..

“As previously disclosed, the Company incurred one-off costs not included in Underlying EBITDA. These included $5.6 million from closing out ineffective currency hedges and from movements in exchange rates during the period. In addition, one-off restructuring costs of $2.0 million were incurred related to the amalgamation of the Company’s North American Processing and Warehouse & Distribution sales teams.

“Software as a Service (SaaS) costs for the period were $6.8 million. These were higher than previously anticipated due to the increased use of external resources for the Enterprise Resource Planning and Transport Management System implementation.”

Reported EBITDA (including Significant Items) was $35.3 million.

The Group reported a Statutory Net Loss After Tax of $13.8 million compared to a Net Profit After Tax of $6.0 million for the prior corresponding period.

And on top of that the company is facing financing strains that might have threatened its future had there not been a bid in the offing

UMG said that net debt at March 31 this year was up an eye catching 43% at $639.2 million compared to $453.4 million at September 30 last year. The March 31 debt is half the company’s market cap of $1.3 billion, up from a third at the end of September.

That was explained “As a result of continued high barley prices; the value of barley and malt inventories and the additional accumulation of barley in the UK for the Company’s expanded Inverness facility, the Company’s net debt/EBITDA ratio at 31 March 2023 was 9.8 times.

“United Malt received covenant amendments from its banks to accommodate the temporarily higher net debt/EBITDA ratio at 31 March 2023.

“As previously announced, the Company has also entered into a receivables factoring arrangement of up to $90 million which provides additional short term financing flexibility.

“The Company expects the increase in earnings in 2 Q from improved commercial terms to continue into the second half.

“When combined with significantly reduced capital expenditure commitments in 2H23 and capital and costs management initiatives underway the Company maintains a pathway towards its target gearing range of 2.0 to 2.5 times.

“The Company believes it will not need to raise additional capital,” directors said.

It won’t with the $5 non-binding bid around. But what happens if it’s no longer at that price, but something lower instead? The higher debt and revenue data will be major items to examine in the due diligence by the French bidder.