Greencore’s “resilient business model” means the food manufacturer is poised for growth, with its Food to Go business remaining the driver, says City analyst Panmure Gordon.
Its analyst Damian NcNeela said Greencore was well positioned to deliver good earnings growth in the financial year 2013. That demonstrated “the resilience of its business model, given the lost contribution to its UK convenience food business following horsegate”, he said.
The firm’s Food to Go division remained the biggest contributor to group profitability, accounting for about 55% of group operating profit, added McNeela, after Greencore’s presentation to Panmure Gordon yesterday (September 17).
The business continued to perform well – benefiting from the hot summer, which boosted sandwich sales. “Like-for-like sales in the food to go market remain attractive compared with the wider market,” said McNeela.
Sandwich sales rose
Sandwich sales rose 10% for the 12 weeks to mid-August, and are 5% higher for the 52-week period. That reflected the improved environment compared with a broadly flat category during the company’s first-half 2013 results, he added.
Panmure Gordon expected the business to grow market share further, as it develops sales through different channels such as coffee shops.
On the legacy of the horsemeat scandal, category sales remain subdued with Neilsen estimating that sales values for the 12 weeks to mid-August were down 1.7% in the broader chilled ready meals category.
But Greencore’s largest sub category, Italian ready meals, fell by 7% during the same period. “The company estimates that lost sales amount to about £15M, which we estimate equates to about £3.8M of lost profit contribution in the financial year 2013,” said McNeela.
While consumer confidence in the category was likely to take time to recover, Panmure Gordon predicted eventual recovery, with Greencore benefiting from recent contract wins.
McNeela estimated the improved performance of Greencore’s UK and US businesses during the fourth quarter should help the firm achieve 9% earnings per share growth in 2014.
The US business was expected to deliver revenue growth, as store sales rise and the firm benefits from a full-year contribution of the Starbucks contract.
Two anchor customers
“Longer term, we see considerable scope for Greencore to develop its US business with its two anchor customers in new geographic areas supplied from its existing asset base,” said McNeela.
“Additionally, there is also scope to supply these two key customers in new areas, which ultimately would require additional investment in its manufacturing capability. But we see this as more medium-term opportunity.”
Despite the “£3.8M headwind” due to falling ready meal sales, McNeela predicted the firm would deliver 14% in adjusted profit before tax at £60.5M. That would result in earnings per share growth of 12% to 14.3p this year.
Net debt was estimated at £236M equating to 2.4x net debt/earnings before interest, tax, depreciation and amortisation.
Taking into account Greencore’s strong cash generation and improving balance sheet, the shares remained attractively valued, said McNeela, who repeated his ‘buy’ recommendation on the firm’s stock.