Ever since the heady days of the West Indian sugar barons, the sweet stuff has been inextricably linked to Britain's economy and shaped its history. Sugar has fuelled wars, deposed monarchs, created vast fortunes for some and thrown others into miserable penury. And now, with the abolition of European Union (EU) sugar quotas in 2017, the industry is set for another massive change. The question, though, is which players will win out when quotas are scrapped? We believe Aim-traded Real Good Food Company (RFD), with its sugar distribution business Napier Brown, stands a good chance of benefiting from the reforms. In fact it could ultimately lead to a doubling of the company's sugar volumes in the next two to three years.
- EU sugar reforms
- Low-cost distribution model
- Multi-sourcing sugar strategy
- Recent retail wins
- Cheap rating
- Fluctuating sugar price
- Short-term price headwinds
Napier Brown, which accounted for roughly 60 per cent of the company's revenues last year and 45 per cent of cash profits, already supplies 12 per cent of the UK's sugar volumes. As an independent distributor, it's not tied to a specific refinery or producer. Instead, Napier can source sugar from anywhere in the world, within quota limits. Currently, it gets one-third of its sugar from outside the EU and is the country's second-largest importer of cane. And it's precisely this ability to distribute sugar from multiple sources inside and outside the EU which could be a major advantage when the tightly controlled sugar market frees up in 2017. For example, should UK production decline, Napier could easily look elsewhere to plug the shortfall. This multi-source model should be attractive to buyers who are looking for a reliable source of sugar, and analysts believe it could see Napier supplying 20 per cent of the UK's sugar volumes by 2017.
What's more, within three years Napier will be distributing low-cost refined cane sugar into the UK from a company called Omnicane in Mauritius - tariff free - through its new, uber-efficient £3.5m sugar handling hub in Humberside. Omnicane owns a 22 per cent stake in Real Good Food and, unlike most of the sugar that ends up on the UK's shores and needs refining, its sugar is refined in Mauritius in a state-of-the-art facility at much lower cost. The deal could boost Napier's volumes by 60 to 70 per cent. It's also worth noting that a liberalised EU sugar market means the efficiency and cost-effective logistics enjoyed by Napier, but often lacking among its peers, will become key as sugar is incredibly expensive to transport.
| REAL GOOD FOOD COMPANY (RGD) | ||||
|---|---|---|---|---|
| ORD PRICE: | 61p | MARKET VALUE: | £42m | |
| TOUCH: | 60-61p | 12-MONTH HIGH: | 74p | LOW: 36p |
| DIVIDEND YIELD: | nil | PE RATIO: | 7 | |
| NET ASSET VALUE: | 127p* | NET DEBT: | 36% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 200 | 1.9 | 2.3 | nil |
| 2012** | 306 | 4.4 | 5.6 | nil |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnigns per share (p) | Dividend per share (p) |
| 2013 | 266 | 6.3 | 7.2 | nil |
| 2014*** | 299 | 5.9 | 6.6 | nil |
| 2015*** | 308 | 7.7 | 8.9 | nil |
| % change | +3 | +31 | +35 | nil |
Normal market size: 3,000 Market makers: 7 Beta: 0.7 *Includes intangible assets of £77.1m, or 111p a share, **15 Months to 31 Mar ***Shore Capital Forecasts | ||||
Fluctuating prices are a potential hazard and EU sugar prices have, admittedly, dropped dramatically in recent weeks, so there are significant challenges in the coming months. But Napier has a lot of experience here, besides which it's the medium-term outlook we're interested in, not short-term margin pressure. Moreover, retail and industrial sales volumes have increased significantly since the start of the new contract season in October. Real Good Food's Whitworths sugar brand, for example, won two lucrative contracts supplying Asda and Booker.
But sugar is just part of the story. The company has four other divisions which supply specialist ingredients to retailers and manufacturers in the UK and overseas. The businesses have been busy investing in their brands and marketing and this is now delivering results in the form of higher sales and volume growth. Next year, a quarter of group revenue will come from branded products.
