Hilton Food's profits hit by higher rates

Hilton Food’s (HFG) profits tumbled as the higher interest rate environment bumped up its finance costs by £8mn and cost inflation contributed to administrative expenses surging by more than a fifth. But there were signs of progress in new chief executive Steve Murrells’ first set of results at the head of the business, as the meat producer tries to further soothe the market after a period of seafood trouble. An immediate boon for investors was delivered with the hike in the dividend, which takes the relative half-year payout back to historic levels.

Revenues were driven higher by raw material price inflation and a full period’s trading for smoked salmon business Foppen, which was acquired in March last year. Volumes were flat, with a 7 per cent increase in Asia Pacific (the company’s biggest market) offsetting declines in the UK and Ireland and Europe.

Demand levels were mixed across categories. While the company’s core meat products continued to be tucked into, the results referred to the “market changes in vegan and vegetarian category” seen of late. Shoppers are taking flight from meat alternatives, which tend to be more expensive than their traditional counterparts, as budget pressures bite during the cost of living crisis. One consequence of this is a restructuring of the Dalco business in the Netherlands, including the closure of a facility. Investors will be hoping that this is a case of short-term cost pressure headwinds rather than the meat alternative market having permanently lost its lustre. 

The higher cost burden was seen in the flat operating margin, which was stuck at just 2 per cent. And Numis cut its full-year pre-tax profit forecast by £3mn to account for higher non-recoverable interest charges. Margins rose slightly in Asia Pacific and the UK and Ireland, but fell in Europe. 

In the full-year results back in April, management flagged “significant challenges” in its seafood business because of longer-than-expected price recovery and disruption from automation investments. The seafood recovery is now “on track”, according to the results, and joint house brokers Shore Capital and Numis expect the business to return to profitability on a full-year basis.  

Shore Capital argued that there is “material medium-term upside from profit growth and ratings expansion” on offer from Hilton Food. The shares trade hands at 12 times forward earnings, according to FactSet, a nice discount to the five-year average of 18 times. While the shares have risen by a quarter year-to-date, the volatility at play keeps us steady for now. Hold.  

Last IC View: Hold, 661p, 5 Apr 2023