For the past few years food producers have faced an uphill struggle to pass on soaring raw material costs to supermarkets operators. Not so meat processor Hilton Food. Although the price of meat has been pumped up by cost pressures, Hilton has consistently managed to recover rising costs and keep its profit margins steady, in the process growing its earnings by 72 per cent over the past five years.
- Factories becoming more efficient
- Key relations with big European retailers
- Ability to pass on raw material inflation
- Dividends poised to rise sharply
- High meat prices hitting sales volumes
- Lower margins than main rival
That's partly because in some markets Hilton has rock-solid contracts that mean it operates on a cost-plus basis. In others, its ability to pass on higher costs is the result of its relationship with its two main customers, Ahold and Tesco. It works closely with these two on product development and pricing across the 12 European countries in which they operate.
What's more, Hilton expects to see further rises in meat prices in the coming years, although it thinks they will be less aggressive than the 7 per cent increase in 2011. That's good news, because record meat prices have seen shoppers cut back on meat, or trade down to cheaper cuts.
That meant Hilton's underlying volumes slipped 2 per cent in 2011, although that was offset by higher prices and the successful ramp-up of a new facility in Denmark. The factory began production three months ahead of schedule, and drove an overall volume increase of 6 per cent in 2011.
HILTON FOOD (HFG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 293p | MARKET VALUE: | £206m | |
| TOUCH: | 290-293p | 12-MONTH HIGH: | 297p | LOW: 245p |
| DIVIDEND YIELD: | 4.8% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 37p | NET DEBT: | 64% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 0.83 | 20.1 | 20.1 | 9.4 |
| 2010 | 0.86 | 22.2 | 22.6 | 10.2 |
| 2011 | 0.98 | 24.5 | 24.7 | 11.1 |
| 2012* | 1.07 | 27.2 | 27.7 | 12.6 |
| 2013* | 1.10 | 30.3 | 31.0 | 14.1 |
| % change | +3 | +11 | +12 | +12 |
Normal market size: 900 Matched bargain trading Beta: -0.1 *Numis Securities forecasts | ||||
Hilton's bosses reckon the commissioning of this new facility is a clear demonstration to potential customers of its ability to support them. But Hilton has also expanded business with existing customers as they move into new territories; over three-quarters of its revenues come from outside of the UK. Even so, Hilton's management thinks that because meat is such a key category, the company will benefit as Tesco seeks to put right its well-documented problems in the UK. Another immediate opportunity is Ahold's expansion into Belgium. The Dutch grocer opened its first shop there in 2011, and plans to roll out more than 50 supermarkets in the next three to four years.
Ongoing investment in capacity means that Hilton should easily be able to handle the extra business this will bring. It has spent £140m on factories over the past eight years and now expects most capacity improvement to come from upgrading its packing equipment. In Holland, for example, six packing lines were recently replaced by three, yet capacity increased. Similar investment is also imminent in the UK, Ireland and Sweden, but capital spending will drop from £26m in 2011 – of which £15m went on the new Danish facility – to a more normal £12m. As a result, borrowing should fall sharply in the years ahead, leaving plenty of firepower for acquisitions or a useful increase in the dividend, which already generates a nice yield.
