• Currency drag
• Tesco volumes building
• Tough consumer market
Like many UK-based companies operating overseas, meat packager Hilton Food Group (HFG) is feeling the effects of sterling's appreciation against a number of currencies in which it does business - the Swedish krona, Danish krone and Polish zloty, to name a few. This drag, reported in a trading update covering the 28 weeks to 13 July, has prompted analysts to marginally adjust their profit forecasts for the current financial year - and also the one thereafter
Nevertheless, Hilton's underlying performance is still robust and volumes are growing. This is largely thanks to the UK, where a new contract with Tesco (TSCO) will lead to an estimated £50m of additional sales for the remainder of this financial year and at least £130m in a full 12-month period. New product lines introduced in the Dutch market in 2013 are also now starting to pay off. In Western Europe, Hilton is working against a backdrop of lower raw material prices, which is a positive development. Finally, the joint venture in Australia is progressing well and construction of the new processing plant in Victoria has kicked off.
Charles Hall at Peel Hunt says…
Buy. The shares have a high short-term rating for a food producer. However, over the next three to four years, we expect to see a £4m improvement in operating profit in the UK and £4m in Australia as the investment with Woolworths comes through. Hilton continues to be highly cash generative with an excellent return on capital employed as well. So, while some markets remain tough, the story at Hilton is more on strategic progress. Currency movements, however, have led us to downgrade pre-tax profit by 3 per cent for the current financial year and the following year to £26.8m and £33.4m respectively.
Charles Pick at Numis Securities says…
Add. Given that 72 per cent of Hilton's sales last year were earned overseas, and given sterling's further recent appreciation, we have made modest downgrades to our pre-tax profit estimates for 2014/16 and trimmed our price target to 592p from 610p. However, it should be stressed that foreign exchange influences are translational only. Moreover, currency issues do not alter the fact that in coming years Hilton will derive major benefits from its expanded UK business and from the joint venture in Australia. We still anticipate start-up costs of £2.1m linked to these projects in 2014 but only £0.2m in 2015 and none in 2016.
