Could Greencore offer better returns than any supermarket?

Food-to-go specialist and Tesco (LON:TSCO) supplier Greencore (LSE:GNC) is poised to bite into impressive growth after a tremendously ambitious acquisition starts to pay off.

Greencore is one of the UK’s largest food manufacturers and focuses on convenience and food-to-go items such as sandwiches, sushi, dips and sauces. These fresh foods are supplied to major retailers like Tesco and Starbucks who flog them to us in a lunch time meal deal. Last year, the company which was originally set up by the Irish government, made its biggest acquisition yet. It bought American food-to-go producer Peacocks Foods for a $745m, with the aim to grab a sizeable piece of the pie across the pond. Exceptional costs associated with deal weighed on profitability for the year to September 29 as pre-tax profit slid from £48.2m to £12.4m. However, it has had an immediate boost to revenue, allowing for an impressive 57% rise for the year. It is clear that the hit to profits was only temporary and now the integration is well underway, Greencore’s market share has increased greatly, yet the share is still very reasonably priced. Analysts are predicting a whoppingly improved pre-tax profit of £148m for the year ending 30 September 2018. Based on this estimate the shares are trading at a relatively attractive forward P/E of around 11.5. 

Organic growth was impressive too, UK & Ireland sales were up 12% on a pro forma basis year-on-year. Adjusted operating profit rose 2.6% to £106m as the US business posted a revenue rise of 5.9% on a pro forma basis, while operating profit was £33.3m compared to a loss of £2.1m in the previous year. This strong organic growth suggests that once Peakcock Foods is fully settled in, management should be able to continue grow sales in the US as well as at home in the UK, so the company definitely has scope to grow.

Encouragingly, the sector is also looking tasty. A squeeze on consumer spending has failed to stop the publics hunger as food sales, particularly fresh foods - Greencore’s staple, enjoyed a bountiful Christmas. Most of the major supermarkets reported strong growth in grocery sales, which grew 3.8% nationally.

In our opinion, the market has undervalued the scale of the peacock acquisition. Greencore has massively increased its market share and landed with a bang in America. With the company’s proven track record of organic sales growth, it should be to capitalise on this further. An internationally established company in a healthy sector with organic growth potential for a projected P/E of 11.5? For a long term buy and hold which offers a reasonable 3% yield, we think it’s a no brainer.

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