Bakkavor is outperforming in a challenging market

It’s a tricky time to be in the food business. Consumer behaviour has adjusted to cost of living pressures as price pressures have hit budgets. Fresh prepared food provider Bakkavor (BAKK) is one company that seems to be doing something right in this challenging environment. It now expects full-year profits to come in around £4mn ahead of consensus forecasts and it has bumped up its dividend.

Factors underpinning the brighter outlook include cost savings after a restructuring of operations (the company forecasts £25mn of annualised savings), a "strong pipeline to support UK share gains", and post-pandemic volume recovery in China. 

But volumes remain under pressure in the company's biggest divisions. Price rises drove revenue up by 8 per cent in the UK – which accounts for over 80 per cent of sales – as volumes fell. Revenue was flat in the US, with volumes hit by a customer loss. 

A reliance on price increases is no surprise given the wider food inflation context of shoppers paying more to get less. Annual UK food price inflation fell to 11.5 per cent in August, according to the British Retail Consortium, but this is clearly still a highly elevated level. Bakkavor has managed to outperform the market, though. Its UK volumes fell by 1 per cent in the half, compared with a decline of more than 3 per cent from the market as a whole, according to the company. 

Reflecting management's cheerier guidance, broker Peel Hunt raised its pre-tax profit forecast for the full year by an encouraging 6 per cent. And an attractive yield of 7 per cent is on offer here for investors. However, the shares are rated at a premium to the historic position. According to analyst forecasts on FactSet, they trade on a consensus 12 times forward earnings, compared with a five-year average of 10 times. Hold.

Last IC view: Hold, 142p, 1 Mar 2019