Meat packaging isn’t the most glamorous of businesses, but Hilton Food (HFG) looks well placed within its sector. Not only does is pack and supply food in state-of-the-art factories for major European supermarkets such as Tesco, Ahold, Albert Heijn and Ica, but it can also point to a degree of growth potential that many of its rivals would struggle to match.
- Australian joint venture should boost earnings
- Robust cash generation
- Delivering decent volume growth
- Attractive dividend yield
- Tough consumer backdrop
- Overly reliant on one client - Tesco
That's because Hilton has entered into a joint venture with Australia's largest retailer, Woolworths. The partnership will see Hilton take a 50 per cent stake in a new company, Woolworths Meat Co Pty, which will operate Woolworth's Bunbury Meat Centre. Hilton will run the facility, providing expertise rather than capital, and oversee an upgrade. Bunbury already supplies 84 Woolworths stores in Western Australia and Hilton could eventually supply some of Woolworths' other 3,000 stores. This is a major coup for Hilton which, until now, had been purely focused on European markets and the potential here has led some brokers to hike their earnings forecasts. Peel Hunt and Panmure Gordon, for instance, have upped their end-2014 earnings estimates, by around 4 per cent and 6 per cent, respectively, on the news.
Even without the joint venture, Hilton looks in reasonable shape. It began expanding from its first facility in Huntingdon in 1999 and the group's success has largely reflected a focus on product development and through following existing customers as they entered new markets. It has benefited, in particular, from the fact that its central meat packing model is one that can be replicated relatively easily, while supply and production chains are flexible - allowing Hilton to seamlessly add fresh product lines for customers and take advantage of consumer-led trends.
| HILTON FOOD (HFG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 310p | MARKET VALUE: | £220m | |
| TOUCH: | 307-310p | 12-MONTH HIGH: | 314p | LOW: 235p |
| DIVIDEND YIELD: | 4.3% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 41p | NET DEBT: | 47% | |
| Year to end-Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 0.83 | 20.1 | 20.1 | 9.36 |
| 2010 | 0.86 | 22.2 | 22.6 | 10.2 |
| 2011 | 0.98 | 24.5 | 24.7 | 11.1 |
| 2012* | 1.03 | 24.3 | 24.5 | 12.2 |
| 2013* | 1.07 | 26.0 | 26.2 | 13.2 |
| % change | +4 | +7 | +7 | +8 |
*Numis Securities estimates Normal market size: 900 Matched bargain trading Beta: -0.08 | ||||
That success is clear from its recent performance. Despite the impact of higher raw material meat prices on consumer demand, Hilton reported overall volume growth of 10.3 per cent at the half-year stage - helped by a contribution from its new Danish facility. The company is also generating plenty of cash - a fact that helped cut the net debt burden by 40 per cent at the half-year point, while also allowing for decent 10 per cent hike in the half-year dividend payout. Moreover, a trading update this month revealed that Hilton's performance had remained solid.
The weak European economic backdrop, though, along with higher meat prices, are a worry. That's forcing cash-strapped consumers to trade down which is bad news for profit margins - the group's half-year operating margin, for example, fell about a percentage point on 2011's half-year margin figure. The group is also experiencing more competition in central Europe and looks heavily dependent on business from a single customer - Tesco, is currently responsible for about 35 per cent of Hilton's sales.
