Greencore falls to a loss as finance costs bite

The market liked what it saw in convenience food manufacturer Greencore’s (GNC) results, with the shares marked up by 7 per cent in early trading on results day. A chunky revenue uplift was driven by price increases as the company sought to recover higher costs, in what remains an elevated and volatile food price environment. Last week, the Office for National Statistics (ONS) confirmed that annual UK food and non-alcoholic drinks inflation was 19.1 per cent in April, down only slightly from 19.2 per cent in March.

Food-to-go and other convenience sales rose by 15.6 per cent and 28.5 per cent respectively in the half on the back of pricing action. There was positive news on volumes, too, with manufactured volumes up by 5 per cent. Packaged sandwiches remain in demand despite changes to working patterns. 

But top-line growth couldn’t stop higher costs tipping Greencore into the red. Finance costs rose by £4mn as higher interest rates increased the cost of debt, and operating profit halved to £3.6mn on the back of what management referred to as “significant” cost inflation, although the board is bullish about cost recovery in the second half. Adjusted operating margin fell by 90 basis points to 1.3 per cent.

Elsewhere, the leverage ratio fell from 2.1 to 1.9 times and an additional £10mn share buyback programme was announced.

House broker Shore Capital “assume a strong bounce back in profitability, with a determination that, hopefully, yields better times thereafter”. That remains to be seen, but Greencore should benefit as commodity prices ease. The shares trade at a notable discount to the five-year average, at eight times forward earnings compared with a historic rating of 12 times according to the FactSet-compiled consensus. Hold.

Last IC view: Sell, 68p, 29 Nov 2022