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Greencore's growth sweet spot

GROWTH TIP OF THE YEAR: The transformative deal gives the food producer an extra helping in the US market
January 5, 2017

Over the past five years, dual-listed, Irish-domiciled convenience food producer Greencore (GNC) has established an enviable growth record by targeting one of the most exciting parts of the UK food market: food-to-go. Indeed, between its 2012 and 2016 financial years it has achieved a compound annual earnings growth rate of 11.1 per cent. The company now looks set to step things up a gear having bagged a major acquisition in the US, Peacock Foods. This will help Greencore target similar consumer trends across the pond as well as benefiting from a move by the American food industry towards outsourcing. We think Greencore's proven ability to exploit long-term growth opportunities in the UK, coupled with its big overseas move, makes it an excellent growth prospect for 2017.

IC TIP: Buy at 237p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Transformative acquisition
  • Long-term growth in food-to-go market
  • Rising dividend
  • Strong customer relationships
Bear points
  • Execution risk
  • Consumer spending Brexit risk

The food-to-go market in the UK is estimated by IDG Retail Analysis to have grown 6.8 per cent to £16.1bn in 2016. By 2021 it's expected to be 35 per cent larger at £21bn. Last year Greencore generated 45 per cent of total sales from the food-to-go market through its ranges of sandwiches, sushi and salads. Most of the rest of Greencore's business is split evenly between prepared meals, such as quiches and ready meals, and groceries, such as table sauces and chilled desserts.

As well as enjoying the general growth trend in its exciting end markets, Greencore has been capturing share. For example, it has organically increased its share of the UK sandwich market from 39 per cent to almost 60 per cent over the past five years. And importantly the group has demonstrated an ability to retain and extend contracts with key customers. The company now commands all of Sainsbury's food-to-go business, up from 50 per cent previously, which will add £40m-£45m in sales, while two other existing customers will add £50m per year to the current financial year's sales. This comes after it recently secured a greater level of business from M&S and is soon set to be responsible for 100 per cent of M&S sandwiches, which has added significance given the retailer's pledge to expand food space by 30 per cent.

But while there's a lot to get one's teeth into regarding the UK business, the reason we're doubling down on this stock just six months after initially making it is the transformative acquisition of Peacock Foods.

 

 

Greencore has gobbled up the business for $747m (£605m). The deal was paid for via a nine-for-13 rights issue (the figures in our table below adjust for this) to raise £439m and £200m of debt at a 3.5 per cent coupon. The strong cash generation credentials of Greencore means debt levels are expected to fall rapidly from the 2.5 times cash profits level they are set to hit as a result of the purchase. The company also has a noteworthy pension deficit, which stood at £162m at the end September 2016, but the rise in bond yields since then should have already alleviated some of this burden and we feel this trend could continue.

The Peacock deal looks truly 'transformational' and will lift US sales from roughly $300m to $1.3bn a year, and take the revenue split from 85 per cent UK and 15 per cent US to 55 per cent and 45 per cent respectively. Greencore has been operating in the US since 2008 and therefore has a good knowledge of the market, which should improve its chances of making a success of its expansion. Management has also met with 70 per cent of Peacock's big-brand customer base, which provides further reassurance for shareholders, and Peacock's current chief executive will stay around for two years to advise the expanded management team.

The Peacock business itself looks to be in an equally sweet spot as Greencore's UK operation. Underlying cash profit grew 37 per cent in the year to the end of September 2016 to $72m and the company is a major player in some of the fastest growing parts of the American food market, especially frozen breakfast sandwiches, kids' chilled meal kits, salad kits and fresh food-to-go. The combination of Peacock with Greencore's US business is expected to give it the number-one position in the first three of these categories.

The acquisition will add giants such as KraftHeinz, Dole and Tyson Foods to the customer roster. The big brands should help put Greencore in a strong position to benefit from a move towards increased outsourcing in the US. The deal brings cost-saving opportunities too, with at least $15m of annual cost savings slated by September 2019 - and the possibility of outperforming this target provides potential for broker earning forecast upgrades.

Fears of a Brexit-induced economic downturn in the UK do hold risks, but Greencore has proved itself to be relatively defensive in the past. During the hash downturn in its 2009 financial year, whilst consumers did trade down, constant currency sales still rose 2.2 per cent and underlying margins increased. And while the food-to-go market declined 3.9 per cent in the first quarter of that financial year, overall sales from this area at Greencore rose 2.4 per cent for the full 2009 term.

GREENCORE (GNC)
ORD PRICE:237pMARKET VALUE:£1.2bn
TOUCH:237-239p12M HIGH / LOW:326p193p
FORWARD DIVIDEND YIELD:2.4%FORWARD PE RATIO:14
NET ASSET VALUE:68p**NET DEBT:116%

Year to 30 SepTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20141.276012.74.5
20151.346314.55.1
20161.487615.85.5
2017**2.2810216.85.5
2018**2.5912117.45.8
% change+14+19+4+5

Normal market size: 7,500

Matched bargain trading

Beta: 0.59

*Includes intangible assets of £552m, or 133p a share

**Davy forecasts, adjusted PTP and EPS figures