I. UK Food & Beverages Industry Landscape

The food and beverages industry encompasses a list of companies that deals with processing raw food materials, packaging, & distribution. Moreover, it includes fresh, prepared foods as well as packaged foods and alcoholic and nonalcoholic beverages.

According to the recently available data from the food & drink federation, the UK food and drink revenue from non-EU countries had shown a modest jump of around 13% during the first half of 2021, representing almost 46.6% (£4.3 billion) of all UK food and drink exports, with higher contributions from China, Singapore, Australia, Japan, and the Gulf region. Moreover, the growth indicated that non-EU exports are now almost back to pre-Covid levels.

With reference to the Office for National Statistics estimates, the family representing an adult & a child from the lowest 10% income levels spend almost £45 per week on food and drink. Furthermore, the food and drink manufacturers have put accelerated efforts to absorb the rise in the raw materials cost levels over the last twenty years.

Key Trends in the Food & Beverages Sector

Risk Exposures to the Food & Beverages Sector

SWOT Analysis

Benchmark Index Performance

Based on the two-year performance, the FTSE All-Share Food Producers index has outperformed the FTSE 100 but underperformed the FTSE 250 index. The FTSE All-Share Food Producers index generated a return of about 5.59%; however, the FTSE 100 produced a return of around negative 1.20%, and FTSE 250 generated a return of around 22.46%

Figure 1: Two Year Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

Food & Beverages Sector Outlook

As per market experts, the total revenue of the UK Food & Grocery sector is expected to reach £211 billion by 2022. The Covid-19 pandemic has accelerated the shift from offline shopping to online, while the loyalty of customers increased. This can have a long-term impact on the distribution network, sourcing strategies, and commodity pricing. For the Alcoholic Beverage market, the volumes had witnessed a massive decline since cafes, pubs and restaurants remained temporarily closed during the Covid-19 led lockdown. Nonetheless, a gradual recovery had already begun. On the other hand, the soft drinks market is projected to post stable growth until 2024, and companies continue to switch from sugary carbonates to drinks with natural flavors with healthier content. The UK Food industry employs nearly 4 million people. Moreover, British food manufacturers are pushing the boundaries by developing new technologies to prolong the food shelf life and leverage innovative environments to introduce new products each year.

II. Investment analysis and stocks under discussion (LNTA, NICL, TSCO)

After gaining insights into the Food & Beverages sector, we would look at the business model of three Food & Beverages players listed on the London Stock Exchange.

1. Lenta IPJSC (LON: LNTA)

(Recommendation: Buy, Potential Upside: 35.16%, Market Capitalization: GBP 1.10 billion)

Lenta IPJSC (LON: LNTA) is a Russian super- and hypermarket chain. It is one of Russia's largest retail chains and the country's second-largest hypermarket chain.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the MACD line remained above the signal line, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 35.16% over the closing price of USD 3.10 (as of 07 September 2021). 

2. Nichols PLC (LON: NICL)

(Recommendation: Speculative Buy, Potential Upside: 24.15%, Market Capitalization: GBP 503.09 million)

Nichols PLC (LON: NICL) is an FTSE AIM UK 50 Index listed company. It is engaged in the software drinks business worldwide with Vimto, Feel Good, Starslush, etc.

The company will pay an interim dividend of GBX 9.8 per share on 10 September 2021. (Ex-dividend date: 29 July 2021)

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 24.15% over the closing price of GBX 1,362.50 (as on 07 September 2021).

 

3. Tesco PLC (LON: TSCO)

(Recommendation: Expensive, Potential Downside: 15.24%, Market Capitalization: GBP 19.98 billion)

Tesco PLC (LON: TSCO) is an FTSE 100 Index listed retailer with multinational operations. It serves customers with healthy, affordable and sustainable food items.

The company will announce its H1 FY22 results on 6 October 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the momentum indicator 14-day RSI (~79.58) is inching towards an overbought zone and suggesting a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 15.24% over the closing price of GBX 258.40 (as on 07 September 2021). 

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 08 September 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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