Bakkavor rosy on profit outlook despite volume pressures

Fresh prepared food provider Bakkavor (BAKK) warned it is "planning for subdued growth" in its key UK market as it guided for total revenue growth of 1-2 per cent and an adjusted operating profit at the upper end of the £95mn-£99.9mn range for 2024. 

Top-line growth last year was driven by price increases, with the UK (which took 85 per cent of sales and pretty much the entirety of operating profit) delivering reported revenue growth of 4 per cent. A total adjusted operating profit of £94.3mn was £3mn ahead of the company-compiled analyst consensus, as 86 per cent of cost inflation was recovered. 

While consumer confidence may be improving, pricing action remains a drag on volumes. The latest data from the BRC highlighted the complex nature of the challenge for food businesses as inflation recedes, with UK food retail sales growth of 6 per cent in the quarter to February 2024 slowing from the 8 per cent seen in the comparative period. 

There were some signs of improvement at Bakkavor's much smaller US and China divisions. Revenue in China soared by a fifth as volumes recovered in the aftermath of pandemic restrictions there. While US revenue dropped by a tenth due to the loss of a client and fewer product launches, profitability improved markedly as the year progressed. 

Meanwhile, free cash flow almost doubled to £103mn, which allowed the company to cut net debt down by £55mn. This meant that leverage fell nicely from 1.9 times to 1.5 times, well within the new target range of 1-2 times. 

A valuation of 11 times forward earnings is slightly ahead of the five-year average. We see few inducements for a change in recommendation at this stage. Hold.

Last IC view: Hold, 101p, 06 Sep 2023