When food-to-go manufacturer Greencore (GNC) bought US business Peacock at the end of 2016 it was meant to transform prospects of the Dublin-based group. Indeed, we felt compelled enough by the logic of the deal to make Greencore a Tip of the Year at the start of 2017. However, an ongoing dribble of broker downgrades (see chart) and uninspiring newsflow turned us cool on the stock over the following year. On the back of a profit warning last month, we're now sellers.
Possible new contract wins
Bid potential
Profit warning
Underutilised sites in US
Management credibility damaged
Softer volume growth in UK
Following the $747m (£530m) Peacock acquisition, management promised shareholders growth and new contract wins. However, what work has been won in the US since the deal has not been enough to outweigh disappointment from contract losses or address pockets of severe under-utilisation across Greencore's 2.5m sq ft of US manufacturing space.
Following a relatively upbeat trading statement in January, Greencore served investors a serious dose of bad news in March, which saw brokers severely mark down their earnings forecasts. Long-touted major Midwestern business wins are now not expected until 2019, some six to 12 months later than originally anticipated, if they come through at all. Meanwhile, an under-utilised site in Rhode Island has been closed. Management still hopes problem sites in Jacksonville and Minneapolis can be turned around through order wins and restructuring.
Given the issues Greencore has faced since the Peacock deal, it is hard to be confident that more problems will not emerge and the cash costs of current restructuring plans may increase from an estimated £3m. Shareholders may well also have to stomach non-cash charges, with broker Shore Capital pointing to a book value of $40m on the recently closed Rhode Island site, which was only built in 2014. In an attempt to get to grips with the problems in the US, there has been an overhaul of management there. This includes Greencore's chief executive, Patrick Coveney, pledging to spend half his time in the US.
Unfortunately, it may prove a bad time for Mr Coveney's attention to be diverted from the UK and Ireland. The second quarter of the group's financial year saw "softer volume growth" from this region. While the recent weakness has been put down to the poor weather, it is only likely to add to investors' nervousness, especially given that about two-thirds of the outcome for the year will rely on second-half trading.
Adding to the strain, the group is operating with high debt levels after borrowing £200m to help finance the purchase of Peacock, the rest of the money coming from a rights issue. Broker Jefferies forecasts that net debt will average 2.4 times cash profits in 2018, although the trend over the year is expected to be downward.
| GREENCORE (GNC) | ||||
| ORD PRICE: | 130p | MARKET VALUE: | £917m | |
| TOUCH: | 129.75-129.95p | 12-MONTH HIGH: | 260p | LOW: 120p |
| FW DIVIDEND YIELD: | 4.4% | FW PE RATIO: | 8 | |
| NET ASSET VALUE: | 100p* | NET DEBT: | 73% | |
| Year to 31 Dec | Revenue (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 1.34 | 78 | 14.8 | 5.1 |
| 2016 | 1.48 | 86 | 16.0 | 5.4 |
| 2017 | 2.32 | 117 | 15.4 | 5.5 |
| 2018** | 2.47 | 123 | 14.5 | 5.6 |
| 2019** | 2.53 | 137 | 15.7 | 5.7 |
| % change | +2 | +11 | +8 | +2 |
| Normal market size: | 7,500 | |||
| Matched bargain trading | ||||
| Beta: | 0.90 | |||
| *Includes intangible assets of £1.1bn, or 153p a share | ||||
| **Based on Jefferies forecasts | ||||
