Greencore looks tasty

What's also enticing about the group is that it is highly geared into other parts of the foods market, such as chilled ready meals, soups, sauces, quiches and a range of desserts.

The group's strength was highlighted recently by the fact it won an extra £45m a year of business from key customer Marks and Spencer, whose food offering is strongest in prepared meals. The additional Marks business is yet to be fully phased in, but should have an impact on Greencore's numbers from the 2016-17 financial year. Extra capacity at its Northampton site and additional capacity via new sandwich lines at other facilities show management's confidence about the prospects.

Given Greencore's broad spread in the UK, we feel the recent sell-off in the shares (see chart above) has been overdone and has created a buying opportunity. Some investors had expected the US operation (15 per cent of revenue) to be profitable in the first half of this financial year, but Greencore's bosses now suggest it won't go into the black until the end of the year. The division was marginally lossmaking in the 2014-15 financial year due to start-up costs linked to its new Rhode Island site, but that plant should stand the group in good stead since it has the space to double its capacity and reach $650m of sales. Management claims to have good visibility at least on the first $450m of sales for 2017-18 as it deepens its relationship with key customers Starbucks and 7-Eleven. Analysts at broker Berenberg say Starbucks is aiming to double its food sales in the US to $2bn by 2019-20 and has invested heavily in its product portfolio, stores and supply chain to achieve this target.

Another issue that has spooked some investors is that the company's tax rate is set to rise rapidly, putting pressure on profit left for shareholders. When Greencore acquired Uniq in 2012 it did so with £400m of tax losses and capital allowances. By the end of the current financial year, all those losses will have been used up, so management is signalling that the tax rate must rise. That said, Greencore's tax burden is unlikely to be out of line with similar companies. Besides, while there is Brexit-induced uncertainty in the UK in the wake of the EU referendum vote, it is likely that corporation tax rates will continue to fall if the UK is to continue to attract inward investment.

Elsewhere, the group's debt is relatively high but, with predictions of the business being able to generate more than £70m of free cash flow by 2018, net debt in relation to cash profits (ebitda) should fall from 2.3 times in the 2015-16 financial year to 1.5 times in 2017-18.