Greencore (LSE: GNC), rated a BUY by Investec
In the early hours of each morning, Greencore delivers more than a million sandwiches to coffee shops, retailers and workplaces nationwide. Short shelf lives, high food standards and the logistics involved make this a complex process. Yet Greencore has perfected it to become the world’s largest sandwich maker.
It has a 36% share of the £3bn UK market, which is expanding at around 6% per year. Greencore produces for both the premium and basic ends of the market. As well as sandwiches, it makes 100 million ready meals each year, six million Christmas cakes and 600 million Yorkshire puddings.
In April, Greencore completed a £25m deal to buy Marketfare, a firm that makes sandwiches and frozen hot dogs for 7-Eleven convenience stores in the US. Then, in July, it splashed out another $17.3m for HC Schau & Son, a fresh-food preparer on the east coast of the US, along with bagging a $50m per year contract with a new customer to supply its stores.
The chief executive, Patrick Coveney, believes the US still has huge potential: the skills developed in Britain in this sector are greatly valued overseas, he says.
The City is forecasting 2012 revenues and underlying earnings per share (EPS) of £1.1bn and 12.25p, climbing to £1.2bn and 14p in 2013. That puts the stock on a low price/earnings (p/e) ratio of 6.2, with a 5.5% dividend yield. The company’s board estimates that Greencore can grow by at least 5% per year and generate sustainable operating margins of 6%.
On this basis, I rate the stock on a nine times earnings before interest, tax, depreciation and amortisation (EBITDA) multiple. Adjusting for net debt of £285m and a £121m pension deficit, this generates an intrinsic worth of 105p per share.
Greencore’s customers and rivals are powerful, so margins could come under pressure. Meanwhile, raw-material costs are rising, net debt needs to be trimmed and the US market could prove tough to crack. Nonetheless, the industry’s fundamentals are attractive.
Investment bank Investec has a target price of 90p per share.
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