According to Allergy UK – Britain’s leading medical charity for people with food sensitivities – a staggering one in three of the population will battle with food intolerance at some point in their lives. Hardly surprising, then, that this segment of the grocery market is growing at roughly 9% per year. Enter Finsbury Foods, the country’s largest supplier of “Free From” bakery products.
The firm makes foods free from gluten, wheat and dairy produce, such as breads, cakes and pastries, under its own Genius and Livwell brands. It also supplies all the major supermarkets with their own ranges. This rapidly expanding part of the group represents around 15% of turnover, with the rest coming from its quality cake (75%) and niche bakery (10%) interests. Here it manufactures party cakes and fruit slices for the likes of Tesco, Asda and Sainsbury, together with producing cakes in Britain for Weight Watchers, Néstle, Disney and Thorntons. However, it’s not all been plain sailing. As the recession has bitten into disposable incomes, families have tended to trade down to cheaper alternatives, while also choosing premium products only when they are on promotion. At the last count that had led to a 9.7% decline in cake sales, offset by 9.3% growth in ‘Free From’ and niche bakery prod-ucts.
In terms of the numbers, house broker Panmure is forecasting turnover and underlying earnings per share of £168m and 6.7p for the year end-ing June 2010. That puts the stock on a price-to-earnings (p/e) ratio of three. This is far too cheap – albeit it does partly reflect the possibility of future fund-raisings, given net debt of £40.6m. Another concern is that the vast majority of revenues are derived from the powerful supermar-kets, so costs and payment terms are constantly under pressure.
Finsbury Foods (Aim: FIF)
Nonetheless, in spite of the elevated risk, I would rate the stock on an Ebita multiple of eight, assuming sustainable margins of 5% (against 3.6% for the first half of the year). After adjusting for its debt, £6.8m in deferred purchase consideration, and a £1.3m pension deficit, I get an intrinsic worth of about 35p per share. At these levels, I would not be too surprised to see Finsbury taken over by an opportunistic bidder.
Recommendation: SPECULATIVE BUY at 20p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments