Convenience food manufacturer Greencore (GNC) has been caught up in the horse meat scandal after traces of equine DNA were found in beef bolognese sauce that it sold to Asda.
The sauce contained meat supplied to Greencore by Ireland's ABP Food Group, a company implicated in the horse meat scandal early on.
Asda has withdrawn the sauce from its shelves, in addition to three other Greencore products, as a precautionary measure: beef broth soup, meat feast pasta sauce and chilli con carne soup. The company is awaiting the results of further tests, raising concerns about the extent of the contamination.
Shares in Greencore fell 20 per cent in reaction to the news, but have since bounced back 10 per cent and are now fluctuating around the 88p mark.
So far, Greencore has only commented on the Asda products. The financial consequences of this recall lie with the retailer and should be small for Greencore if contamination is limited to just this range. The sauce in question is manufactured at the company's Bristol Soup and Sauce factory, which generates roughly £40m of annual revenue, a relatively small fraction of the company's £1.2bn of total sales. Pasta sauce is also a small product for Greencore. Ready meal sales, which include sauces, account for £250m of total sales.
But if horse meat were found in other Greencore products and in food it supplied to other retailers, such as Marks and Spencer, this would be more of a concern. Until the extent of the contamination is confirmed - and the possible health risks arising from the equine drug Phenylbutazone - it is difficult to quantify the financial impact on Greencore.
The Food Standards Agency is expected to release the outcome of the first batch of broader tests across the industry today (15 February). While these developments create a great deal of nervousness, the underlying investment case for Greencore should not be ignored. The company has a strong balance sheet, a dividend yield of 4 per cent and is trading on a hardly demanding 6.7 times earnings for the 2013 calendar year. Furthermore, Greencore has a solid business in the US and the shares are still up on our buy recommendation in May (Buy at 72p).
"Greencore is a reputable and professional organisation. In due course Greencore and the broader food chain will emerge with a more robust procurement system," says Darren Shirley, an analyst at Shore Capital.
Asked by Investors Chronicle if any of the suppliers that Greencore used had been implicated in or linked to the horse meat scandal, Greencore replied on 13 February that it had conducted an audit of its entire product range and, as a result, the company had no reason to believe it had been affected in any way.
The greater issue here is negative consumer sentiment towards products containing beef, and the longer the scandal runs, the worse the damage. Yet, the public's collective memory is short and, when the issue has died down, consumer demand is unlikely to change significantly. It's also worth remembering that investors generally overreact to announcements like this and, once the dust settles, Greencore's fundamental strength means the shares are likely to bounce back and recover some of the loss. As such, we move the shares to a hold until there is more clarity about the scope of the contamination.