HKFoods: The sale of the Polish bacon unit could be enough to redeem the hybrid bond

Translation: Original published in Finnish on 04/29/2025 at 07:58 am EEST

The company launched a preliminary investigation to assess the future of its Polish unit. According to our calculations, the sale of the business could be enough to finance the repayment of the expensive hybrid loan, if the selling price in the divestment is high enough. We estimate that the profitability of the Polish business is clearly above the Group average, so we do not believe that the selling price will exceed the Group's average earnings-based valuation level. Nevertheless, redeeming the hybrid would be positive for the equity story, even if the transaction itself would not unlock any so-called hidden value.

The last major foreign business may be sold

On Monday, HKFoods announced that it has launched preliminary investigations to assess the future of its production unit in Swinoujście, Poland, which also includes a possible divestment of the unit. In recent years, HKFoods has undergone a significant restructuring after selling its Swedish, Baltic, and Danish businesses. The restructuring has enabled the company to gradually strengthen its balance sheet and focus on developing its Finnish operations. However, the balance sheet situation is still somewhat challenging, partly due to the company's dividend distribution decision made in the spring.

Exports play a key role in the Polish unit's business model

The Polish bacon unit's revenue in 2024 was 70 MEUR, in addition to which the unit has intra-group sales (to HKFoods' Finnish operations). The unit employs some 300 people. Most of the revenue comes from exports, mainly to HKFoods' former and current Group companies (the largest being Scan in Sweden). We believe key customers, such as Scan, have made long-term purchase agreements with the Polish bacon unit. We estimate that the Polish company’s EBIT is just over 4 MEUR (approximately 5-6% of total revenue of some 80 MEUR), which is partly based on historical figures from local financial statements for 2021-23. A significant part of the raw material used by the bacon unit comes from its customers’ home markets in the Nordic countries. In addition, in recent years, the company has also invested in growing its local business, which uses meat raw material sourced locally or from nearby EU regions.

The divestment could enable redemption of the hybrid

HKFoods has an expensive hybrid loan of approximately 26 MEUR on its balance sheet, with an annual interest rate of 16%, and we believe that repaying it would be important from a value creation perspective. Debt covenants have so far prevented the redemption of the hybrid bond, and the AGM's decision to distribute a capital return of at least EUR 0.09 per share to shareholders has made this even more challenging. If we optimistically assume that the divestment of Poland is completed during the summer, with the total revenue of the Polish business at 80 MEUR, an EBIT margin of 5.5%, an EBITDA margin of 8.5%, and a transaction price of 40 MEUR (EV/EBIT 9x), the transaction could enable the redemption of the hybrid loan in September 2025. Net debt after the redemption of the hybrid would be 157 MEUR at the end of Q3 (197 MEUR without the divestment), assuming that no additional capital return is distributed on top of the already decided EUR 0.09. In this case, the net debt to EBITDA ratio at the end of Q3 would be 2.86x (3.2x excluding the divestment), while the covenant is 3x. We estimate that the net indebtedness would also remain within the limits of the covenant. The balance sheet would likely strengthen towards the end of the year with the seasonally strong cash flow in Q4, allowing the company to build a safety margin relative to covenant levels, assuming that profitability development remains at least stable. The biggest uncertainties in the calculation relate to the selling price of the Polish business and the development of HKFoods' profitability level, which is moderately positive in our forecasts.

Some previous divestments have released hidden value, some haven't

The impact of a potential sale of the business on HKFoods' covenants and the stock's attractiveness depends on how high a price the company would get in the sale. Of the previous divestments, the sale of the Baltic operations in particular unlocked significant value in our view, as the selling price was high relative to the business' insignificant earnings level. On the other hand, we believe the divestment of the Swedish operations was completed at fairly low valuation multiples (normalized EV/EBIT 6.5-9.0x depending on whether factoring debts are included as part of the selling price). Given the high profitability of the Polish business, we consider it unlikely that the sale would release ‘hidden value’ for investors. Nevertheless, the transaction could still bring value to shareholders by enabling the repayment of an expensive hybrid loan.

Source: Inderes' estimate (the current forecast does not include the Polish divestment and assumes redemption of the hybrid in 2026)