Seafood woes hit net income at Hilton Food

Markets usually welcome the announcement of a company’s new chief executive. Unless, of course, that company has also told the stock exchange about falling profitability in the same breath. 

This is the case for meat producer Hilton Food (HFG) – which reported a 3.3 per cent fall in adjusted operating profit to £71.1mn for the 2022 financial year. Shortly after, it was revealed that former Co-Op chief executive Steve Murrells would be stepping into the top job, with current principal Philip Heffer moving elsewhere in the business. 

The company said it increased its overall sales volumes across 2022, but that this was overshadowed by “significant challenges” in its UK seafood business. 

Management cited “unprecedented” inflation levels, as well as a longer-than-expected recovery in prices as the reason for the division’s underperformance. The issues in UK seafood were also blamed for cutting Hilton Food’s operating margin to 1.8 per cent from 2.2 per cent in 2021. 

All told, macro volatility took a sizable toll on the group – with higher interest costs eating into pre-tax profits and higher effective tax rates taking more than 25 per cent off of its adjusted earnings per share. With shares trading at 11.8 times forward earnings for the current calendar year, it’s easily argued that Hilton’s troubles are already priced in. This is the view of Numis analysts, who write that the company “offers a combination of high quality earnings from existing operations and potential incremental growth opportunities which is not fairly reflected in the current valuation”. However, we’re content to wait to see how the first quarter of 2023 plays out for the group, particularly with regard to the integration of acquired assets.

Management said there is a new leadership team in place in the tricky UK seafood division, “which is performing well to implement a series of steps to rebuild profitability”. But a recent upward move in salmon prices could further complicate recovery efforts. 

Despite a challenging environment, bears might note that the group’s operating cash flow remained fairly strong in 2022 at £98mn (from £121mn the previous year). And there’s no denying the present valuation is appealing. We don’t see the harm in waiting a little longer, though. Hold.

Last IC view: Hold, 693p, 16 September 2022