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African Swine Fever is driving demand for pork exports, while the food producer is investing in future growth
March 3, 2020

Cranswick (CWK) supplies fresh and value-added food to UK grocery retailers, including pork, poultry, convenience and gourmet products. Sitting in the premium category, it is vulnerable to downturns in consumer spending. But, despite the economic uncertainty last year, data from Kantar indicates sales growth from supermarkets’ own-label premium products outpaced the budget ranges in the 52 weeks to 6 October 2019. Amid a highly competitive domestic market during 2019, Cranswick’s like-for-like sales still rose 5.4 per cent in the six months to 30 September, while adjusted operating profit ticked up 5.6 per cent to £47.4m. Adapting to the changing retail landscape, it has been targeting stronger sales growth from discounters such as Aldi.

IC TIP: Buy at 3,352p
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points

Export growth

Poultry potential

Analyst upgrades

Low leverage despite high capex

Bear points

Margin pressure

Reliance on EU imports

Exports constitute just under a tenth of overall sales and the group is capitalising on the disruption caused by African Swine Fever (ASF). Rabobank estimates that more than half of China’s pig herd was laid waste by ASF in 2019 and the supply shortage sent Chinese pork imports and prices soaring. This has been quite the boon for Cranswick, which saw export revenue surge by 65 per cent in the first half of the 2020 financial year, with Far East exports almost doubling. Far from a short-term phenomenon, it could take around five years for China to rebuild its herds. Turmoil from the coronavirus could impede this process, sending prices higher in the short term and offsetting any volume decline. The flipside is that UK and EU standard pork prices have also increased, meaning higher input costs must be passed on to retailers.   

Cranswick has a track record of investing to expand capacity and improve efficiency, with over £346m of capital expenditure in the past eight years. It is building scale in the fast-growing poultry market where, prior to recent investment, broker Numis estimated it only had a 2 per cent poultry processing market share versus 26 per cent for pork. A new £75m poultry processing facility that opened in November has a long-term agreement to supply Wm Morrison (MRW) and should lift the number of birds Cranswick processes from 0.5m per week to 1.2m. There could potentially be a further £90m invested in the facility to expand capacity to 2m birds per week and develop its cooked poultry capability, which Numis believes could add up to £18m to adjusted operating profit.

A little over a year ago, Cranswick’s shares had taken a tumble after a poorly received third-quarter trading update triggered analyst downgrades. It had reported a 2 per cent year-on-year decline in sales and warned that a challenging commercial landscape and start-up costs for the poultry facility would hit 2020 margins. By contrast, the third-quarter trading update for the 2020 financial year raised guidance, projecting that full-year adjusted pre-tax profit will be ahead of expectations. This followed robust trading over Christmas, revenue growth across all divisions and “exceptionally strong” export sales. It has marked the moment analysts began upgrading forecasts once again (see chart).

Including the addition of £46.5m in lease liabilities, the group swung from a £6.3m net cash position to  £114m of net debt in the six months to September. This came amid record first-half gross capital expenditure of £56m – including £24.1m on the new poultry facility – and £41.3m spent on acquiring Katsouris Brothers, which has broadened its non-meat offering. Cranswick is guiding to £100m of capital expenditure for the full year. While Numis forecasts that the wait to fill capacity will contribute to squeezing the adjusted operating profit margin from 6.4 per cent to 6.1 per cent, the broker forecasts recovery by 2021. Net debt of £84m is forecast by the 2020 year-end, equivalent to 0.6 times expected adjusted cash profits. But strong cash generation should see net debt fall to £7m in 2022. With headroom for more acquisitions, the group could expand its pig farming beyond the current 30 per cent self-sufficiency, reducing vulnerability to potential tariffs on EU imports post-Brexit.  

CRANSWICK (CWK)    
ORD PRICE:3,352pMARKET VALUE:£1.7bn  
TOUCH:3,350-3,354p12-MONTH HIGH:3,912pLOW:2,454p
FORWARD DIVIDEND YIELD:1.9%FORWARD PE RATIO:19  
NET ASSET VALUE:1,082p*NET DEBT:20%**  
Year to 31 MarTurnover (£bn)Pre-tax profit (£m)***Earnings per share (p)***Dividend per share (p) 
20171.257612144.1 
20181.469214553.7 
20191.449214455.9 
2020***1.649815257.0 
2021***1.8011017163.3 
% change+10+12+13+11 
Normal market size:750    
Beta:0.71    
*Includes intangible assets of £191m, or 368p a share
**Includes lease liabilities of £46.5m
***Berenberg forecasts, adjusted PTP and EPS figures