Get more turnaround gains from McBride

The first stage of new management's turnaround strategy put a rocket under the share price, which is up by almost one-and-a-half times since we tipped the company a little under two years ago, and we believe there's more to come as chief executive Rik De Vos and chief financial officer Chris Smith get stuck into the next two stages of the company's overhaul.

The initial self-help 'repair' phase of the turnaround has seen the group cut 75 per cent of its customers, which only accounted for 3 per cent of sales. The expected £20m impact on revenue is more than being made up for in profit terms by the opportunity to cut £12m a year in costs. Meanwhile, the sharper focus helped the group drive harder bargains when buying inputs, which saved a total of £5m in the 2016 financial year.

Thanks to these efforts, underlying margins rose from 4 per cent to 5.3 per cent last year, towards a medium-term target of 7.5 per cent. This helped send operating profit, excluding nearly £18m of restructuring costs, up more than a quarter to £36.2m. And return on capital employed (ROCE) increased from 18.8 per cent to 23.4 per cent, getting close to the three- to five-year target of 25-30 per cent set in 2015.

Management has started the second 'prepare' stage of its three-step plan, which involves increasing capital expenditure to ready McBride for the 'growth' stage of the plan. So, following a fall in capital expenditure from £21.9m to £12.8m last year, spending is expected to jump to £20m-£25m annually as £100m is ploughed into the business over four years. The wait between investment and anticipated returns could slow the upward march of ROCE temporarily, but upgrading and increasing capacity at five key sites is a sensible step towards fully rejuvenating the business.

Despite the plan to increase spending, debt levels are expected to remain broadly stable. While debt is on the high side at £91m, especially factoring in the group's £31m pension deficit, the decision to cut the dividend last year, coupled with improving cover, means McBride's payout looks fairly secure. What's more, broker Numis is forecasting that profit growth will support raising the dividend to 5.9p come 2019, which represents a prospective 3 per cent yield.