This summer has created the perfect storm for meat producers. Wet weather has put paid to the barbecue season and consumers have traded down to cheaper products such as meatballs and mince. Supermarkets are fighting price wars, and animal-feed prices have spiralled upwards owing to droughts in America.
Yet one company is still making profits. European meat packer Hilton Food reported that revenues rose in the first half-year. It has followed a three-pronged strategy.
Firstly, it wants to follow existing customers into new markets – for example, Tesco in central Europe and Dutch grocer Ahold in Belgium. The latter opened its first shop there in 2011, and plans to roll out more than 50 stores by 2015.
Secondly, it wants to enter totally new territories like Denmark, where it has just built a state-of-the-art packing facility to serve clients such as Coop Danmark.
Thirdly, it will continue to innovate by launching differentiated products such as spreadable meats in the Netherlands.
Hilton Food Group (LSE: HFG), rated a BUY by Panmure Gordon
The strategy is working. The firm is benefiting as supermarkets focus more on own-label products, and work with fewer, more-efficient suppliers, who can guarantee food traceability and quality. Hilton’s plants are achieving ultra-low unit costs, alongside the levels of hygiene, shelf life and product assurance required by the industry.
Hilton derives 75% of sales from northern and central Europe; the outlook in Holland, Poland and Sweden in particular is good. The board has also proved remarkably adept at passing on raw-material price increases to its customers.
The upshot is that the City expects the group to pay a 12p dividend in 2012, alongside turnover and earnings per share (EPS) of £1.05bn and 26.5p respectively. That puts the shares on a price/earnings (p/e) ratio of 10.3. I value them on an earnings before interest, tax and amortisation (EBITA) multiple of nine. Deducting net debt of £18.7m generates an intrinsic worth of 325p per share.
So what are the risks? A prolonged recession across Europe certainly won’t help, although the firm has coped well so far. Other factors to watch include volatile meat prices, input costs and foreign-currency movements, together with food scares and ongoing price pressures from supermarkets.
However, with an expanding regional presence, Hilton looks like a good place to pick up a decent 4.4% dividend yield (twice covered). Interims are scheduled for Tuesday 11 September, and broker Panmure has a price target of 355p.
Rating: BUY at 270p (market capitalisation £190m)
• Paul Hill also writes a weekly sharetipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more information.