A food producer bringing home the bacon

In the UK, food inflation hit a record high in March as fruit and vegetable shortages drove prices upwards. According to the British Retail Consortium (BRC), annual food price inflation reached 15 per cent in March, up from 14.5 per cent in February. Agricultural labour shortages in the domestic market, impacted by both Brexit and the pandemic, have caused major headaches for companies. 

To these pressures, we can now add scandal. Last week, a report by trade publication Farmers Weekly alleged that an unnamed food manufacturer had been selling up to tens of thousands of tonnes of mislabelled and rotting pork a week until at least the end of 2020, prompting the Food Standards Agency (FSA) to launch its own probe. Criminal charges could follow.

Cranswick (CWK) is not the company in question, the Investors’ Chronicle understands. In fact, the unsavoury episode serves to highlight how the FTSE 250 food producer is positioned firmly at the other end of the ethical and operational spectrum from such disreputable behaviour.  

Steady and diversified growth

Cranswick has proved itself to be a leading player in its sector, having grown sales and operating profits by roughly 60 and 80 per cent, respectively, over the past five years. Analysts expect this to continue, albeit at a slower pace (see chart). It sells to the big UK grocers, premium and discount operators, and hospitality chains, and has grown its presence in the food-to-go category, via sales to coffee shop chains and similar customers.

The investment strategy is also a plus. HSBC, which sees Cranswick as “a beacon of resilience”, puts the group’s return on invested capital at 16 per cent in 2022, and expects it to stay in the mid-teens range for the next few years. The company is also ambitious in scoping and mitigating the environmental impact of its operations, and is taking action on energy, waste and feed sourcing. With an aim to be “the world’s most sustainable meat business”, it is committed to being a net zero business by 2040.

Some well-diversified revenue streams are all also posting growth, despite a tough backdrop. Sales for the six months to September showed the convenience division (which includes cooked meats and continental products and makes up two-fifths of revenue) grew 13 per cent year-on-year, while the fresh pork, poultry and gourmet products arms climbed 5.9, 7.6 and 19.5 per cent respectively. A recently acquired pet food division currently accounts for a negligible proportion of sales.

While the company is UK-focused, it's steadily expanding its export business. Although total sales to overseas markets, where the Far East is a particular focus, dipped 4 per cent to £79mn in the first half, following softer volumes and pricing at the start of the recently ended financial year. However, a February trading update for the third quarter to 24 December 2022 stated that export prices have proved “significantly stronger”, reflecting strong sales growth across the business.

While the broader sector has struggled to maintain output, Cranswick noted “solid underlying volume growth” in its core UK market, highlighting its success in handling cost inflation. While this remains a risk to profitability, Investec analysts estimated that third-quarter volumes grew 4 per cent and that sales jumped a fifth.

This suggests the business is working well to protect margins, although it is a fine balance. Elevated feed prices have led the UK standard pig prices to jump by half to over 210p per kg in a year, according to a closely followed industry benchmark. Quite how price-inelastic UK pork eaters will prove in the year ahead will be a key determinant of Cranswick’s sales growth.  

Trends, risks and investment

Changing consumer habits suggest the company is well positioned to benefit. Shoppers, increasingly mindful of costs and inflationary pressures, are more price-sensitive and are increasingly turning to private-label (ie, supermarket branded) food options. Pork and poultry – the bulk of Cranswick’s business – are also more attractive items for many shoppers, in price terms, than lamb and beef. Add to this that most of Cranswick’s sales are private label, and a bullish outlook for the top line is well supported. 

Group strategy isn’t all meat-based. A push into plant-based foods, via the 2021 acquisition of Ramona’s Kitchen, looks canny. The separate move into pet food – a category that is doing well in the battle for discretionary spending – is also expected to deliver £28mn in annual sales by 2025. 

Food production isn’t all about opportunities. Risks, such as the heightened threat of African swine fever (ASF), also need considering. Widespread resurgence of the incurable hog disease in China – where a large outbreak severely hit pork markets in 2018 and 2019 – has again led to mass culls and forecasts of lower output. Closer to home, Germany, Poland, Romania and Italy have all seen cases.

Cranswick is unsurprisingly alert to “the impact an outbreak of ASF would have on the UK pig industry and its ability to continue exporting” and cites both ASF and avian influenza – the latter of which was detected at five of Cranswick’s poultry farms in the third quarter – as key business risks.

The risk of labour shortages, which have hit some UK peers, can’t be overlooked either. In this area, the company has been proactive. Last year, it said it had taken on hundreds of skilled butchers from the Philippines and that investment in labour had helped ease constraints. 

Continued investment to upgrade production and operating facilities is also a key medium-term growth driver, say analysts. House broker Shore Capital puts the past decade’s capital spending at £615mn, while “several substantial projects” – including sustainability initiatives – are ongoing. The extension of the super-deduction tax (recently rebranded full expensing) is therefore a big positive. Investment in pig farming assets has also created a more self-sufficient business that is less sensitive to third-party failures. Two-fifths of Cranswick’s total requirement for British pigs is now met within the business, and analysts are bullish that this rate will soon be higher.

Although this spending has pushed up leverage, total net debt of £137mn is less than a fifth of shareholder equity and easily covered by adjusted annual operating profits. So while the cost of capital is up for Cranswick and every business, this looks more than reflected in a forward PE multiple of 15, itself a 20 per cent discount to the five-year average.

Shore Capital argues that this presents “a significant opportunity” for investors. We concur. While UK food producers and the broader agricultural sector face some tough and stubborn headwinds, Cranswick’s business has plenty to be bullish about. The current rating therefore presents a good moment to buy.