The horse meat scandal earlier this year has continued to affect sales of Italian ready meals at Greencore's (GNC) UK convenience foods division. Here, third quarter like-for-like revenue fell 1.3 per cent on last year, mirroring declines seen in the first half. Now, management estimates that sales lost to 'horsegate' will total £10m to £12m for the 2013 financial year.
But if conditions in the UK ready meals market were tough, trading in the US went from strength to strength, with revenue rising more than 50 per cent in the quarter. This reflected strong performance from the now-fully integrated MarketFare Foods and Schau acquisitions, a new contract to supply Starbucks with food-to-go and robust trading with Greencore's biggest US customer, 7-Eleven.
As a result, turnover in the entire convenience foods division ended the quarter up 2.8 per cent - a significant improvement on the 1.8 per cent rise in the first half. This also helped boost total group revenue in the third quarter, which rose 2.6 per cent to £306m, also an improvement on the first half.
Numis Securities says...
Hold. The third-quarter decline in UK convenience foods may have disappointed some, with the Italian ready meals market, to which Greencore is most exposed, still in year-on-year decline owing to its greater use of beef. However, everything seems on track with Greencore, although higher input costs are expected next year. Management says the UK market "feels a bit better", with consumer confidence higher over the summer. The decline in the UK prepared meals division has lessened and service delivery to Starbucks has been good, with hopes of extra business here in due course. We now assume fourth-quarter sales progress of 5 per cent for base operations plus £8m added from Starbucks. Expect full-year EPS of 14.7p, rising to 17.1p in 2014. Hold.
Panmure Gordon says...
Buy. Greencore's third-quarter trading update indicates that the horse meat issue continues to act as a drag on UK convenience growth, but a strong performance from the US and ongoing efficiency improvements should allow the company to deliver on current year expectations. This gives us scope to upgrade our below-consensus trading profit forecasts by 3 per cent and 2 per cent in 2013 and 2014 respectively. Therefore, our forecasts suggest adjusted EPS growth of 12 per cent and 10 per cent in 2013 and 2014. We believe a forward PE ratio of nine for next year remains attractive and raise our 12-month target price from 125p to 165p.
