In theory, food firms should be a safe bet in times of crisis – people need to eat, after all. But this company doesn’t seem to have read the script. Since May last year, the shares have dived around 30% from 132p, mainly on soaring commodity prices, worrying noises from peers, and a net debt pile of £213m as at the end of December. But the sell-off looks overdone, giving adventurous investors a speculative buying opportunity.
Northern Foods (NFDS), tipped as a BUY by The Times
Firstly, even though the firm is being hit by raw-material cost inflation of almost 10%, it’s raised prices to protect margins without unduly hurting demand. At last week’s pre-close trading update, chief executive Stefan Barden said the firm had successfully passed on the cost of more expensive commodities (eg, wheat, cocoa and dairy) to customers. He also noted that “in more difficult times, people tend to trade down from restaurants” to eating in.
For the year to 29 March, revenues grew organically by 3.2%, giving sales of around £925m, with prices up 2.4% and volumes 0.8% higher. Profits are set to come in above City hopes of £47.5m – delivering estimated earnings per share of 7.4p and a dividend of 4.0p (yield 4.3%) for the year to March 2008. The better profitability reflects a reduction in complexity and a shift in product mix towards more value-added items. Barden added that with factories working at, or near, full capacity, the group could now turn down less attractive contracts, improving return on capital. Northern had “more demand than it can supply”.
For the next two years, the City expects turnover and underlying earnings per share of £967m and 8.7p respectively in 2008/2009, rising to £1bn and 9.8p in 2009/2010. That puts the shares on undemanding forward p/e ratios of 10.6 and 9.4. The debt position is manageable, with interest payments covered 4.5 times. Around 60% of the loans are fixed until 2012 at an interest rate of 5.5%.
Are there any other potential pitfalls? The cut-throat food retail market is highly competitive, demanding constant innovation from suppliers. Also, around 75% of sales come from its top five accounts – Asda, Marks & Spencer, Morrisons, Sainsbury’s and Tesco – so fostering good relations with these chains is vital. And Northern sells mainly to UK consumers, so is subject to fluctuations in disposable income and confidence.
Although not without risk, Northern looks good value in these more uncertain times. The directors seem to agree, with four, including the CEO and financial director, buying stock over the past five months. Full year results are due out on 27 May 2008.
Recommendation: speculative BUY at 93p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments