I. Sector landscape and outlook

Food producing activities, such as agriculture, farming, fishing and poultry, etc., are essential services, and have continued to operate in the COVID-19 induced lockdowns. Since economies are re-opening now, the lagged demand for food materials from the dine-in segment will likely revive gradually. Food commodities' inputs to dine-in places have seen severe disruptions across the globe due to the Great Lockdown, and there remains uncertainty and thus opportunity on the return to full capacity utilisation in the dine-in sector, including restaurants, hotels, clubs, cafes.

The UK Food and Drink Industry is the largest manufacturing sector. It is larger than automotive & aerospace combined and contributing £31.1 billion to the economy annually and employs 450,000 people. Food and drink industry turnover is more than £104 billion, which accounted for almost 19% of the UK's total manufacturing according to data provided by the Food and Drink Federation (FDF). Exports of UK food and drink have a critical role to play in supporting the sector during these challenging times and driving the UK's wider economic recovery. Food and Drink Federation is working with the Government to address critical gaps in sector-specific export support that is urgently required.

Fig 1: UK Food & Drink Industry at a Glance.

Source: Food and Drink Federation

UK Food & Drink Export – Q1FY20

In the first quarter of 2020, the UK, food, and drink exports tumbled by £700 million or 12.7% compared to the same period of the previous financial year. Sales to European Union member countries were the hardest hit, with the total value slumped by 17.4%. The slump was primarily on account of impacts of COVID-19 pandemic, comprising the closure of hospitality and travel sectors which lead to loss of sales into restaurants, cafés, bars and the out-of-home sector across Europe.

While sales in the UK top markets have deteriorated, but at the same time demand has been more resilient from other markets, including Singapore, Canada, and Norway, which have each reported a sales growth of more than 10%. The UK's food and drink trade deficit also decreased compared to 2019, indicating decreased relative reliance on imports.

Also, lower offtake has been reported in the UK's top ten products, with whisky, chocolate, cheese, salmon, and gin seeing export value drops of over £20m in the first quarter of 2020. Pork meat which saw an uptick in value, and beef and vegetables, which recorded volume surge, were exceptions to this. Branded food and drink exports have slumped to the EU but have seen an increase towards non-EU countries both from the value and volume standpoint, primarily because of demand spurt from China, the US and Australia.

Fig 2: Top-10 Products UK Export


Source: Food & Drink Federation

Key opportunities

UK pig meat exports picked up in June: Pork export recorded growth on a year-on-year basis, following Coronavirus pandemic led turmoil hurting volumes in May 2020. Meanwhile, UK imports of pig meat continued to track below the previous year in June, although the rate of decline was not as large as we have seen in recent months. The UK exported a total of 21,100 tonnes of fresh/frozen pork in June, 15% higher than in the same month corresponding previous year. The return to pork export growth suggests that much of the logistical disruption caused by the pandemic was largely resolved. This means in the first half of 2020, UK pork exports totalled 124,300 tonnes, 6% more than in the first half of last year. Exports to China remained at elevated levels in June, with shipments of pig meat (incl. offal) up 44% in volume terms on the year. Average export prices, meanwhile, dropped back by around £90/tonne on the month.

Fig 3: UK Pig Meat Trade


Source: IHS Markit & Trade Global Trade Atlas

Export Opportunities in Saudi Arabia and the Gulf region are increasing: The Gulf region held for almost 60% of the UK's food and drink exports to the Middle East region and have been marked as priority markets by FDF. Saudi Arabia, in particular, and the wider Gulf region witnesses humongous surge in branded good exports from the UK in 2019 (48% and 12% respectively).

Fig 4: Exports to Saudia Arabia and The Gulf Region


Source: Food & Drink Federation

UK beef trade returning to normal: The latest statics from the UK government shows that the UK produced 80,100 tonnes of beef and veal in July. This is 9% or 6,600 tonnes more than was produced in July last year. The upticks in production were primarily because of a higher kill figure for both prime cattle and cows. In July, 177,300 prime cattle and 57,100 cows were slaughtered, a rise of 10% (15,600 head) and 12% (6,000 head) on the year, respectively. The July figures put UK beef and veal production for January-July (inclusive) at 533,700 tonnes, up 2% (11,200 tonnes) from the same period in 2019. Prime slaughter for the same period stands at 1.2 million head, while cow slaughter stands at 367,800 head, both up 2% on the year.

Growth in exports to the US, Australia, and China: The US, Australia and China all reported sustained demand for UK branded food and drink in the first quarter of 2020. Together, these geographies are crucial sources of demand. In 2019, these accounted for almost 10% of all UK branded exports, and over 15% of overall food and drink exports. Branded exports to Australia reported a growth of 3.5% in the first quarter of 2020, led by a surge in sales offtake of cakes and baked goods (including tarts, pastries, wafers, pizzas and quiches), which saw a 12% increase on Q1 2019. Exports of drinks drove overall sales growth to the US. Namely, beer and soft drinks which performed well over the 3 months to March 2020 - these categories combined were worth £42m. Nevertheless, an extended period of lockdown early in 2020, branded goods exports to China enhanced to £34m in the first quarter, mainly on account of an increase in sales of gin, as well as bottled water. As China enters its post-Covid-19-recovery, CBBC has begun running virtual trade missions, meet-the-buyer events, and trade shows.

Fig 5: Top markets for Branded Food and Drink


Source: Food & Drink Export Association

UK Business Confidence Survey: Q2FY20

The latest Business Confidence Survey conducted by the FDF shows that net business confidence reached a record low in Q2, at –65.2%. Key concerns for 2020 include lack of demand from the hospitality sector, failing to secure a preferential trade agreement with the EU, and UK imports tariff uncertainty. All of these were reported by over 65% of members. GVA, exports, and net confidence all declined in Q2, while inflation and wages increased. Lockdown measures resulted in reduced demand and cash flow issues for many food and drink businesses supplying the hospitality and out-of-home sectors.

                                                                       

Source: Food & Drink Federation

Government Support Available for Exporters Affected by COVID-19

UK Export Finance (UKEF) Export Insurance expanded its Export Insurance Policy (EXIP) to cover sales to the EU, US, Canada, Norway, Switzerland, Iceland, Australia, Japan and New Zealand. They offer insurance covering up to 95% of the value of an export contract, protecting against the risk of non-payment where customers become insolvent, or their Government's actions make fulfilling a contract impossible. UKEF works with banks and insurance brokers to provide guarantees, loans and insurance to protect exporters facing delayed payments or transit restrictions:
 

1. If a business is facing disruption due to late payments, UKEF can help ease cash flow constraints through its Export Working Capital Scheme.

2. If exporters are concerned about getting paid, UKEF offers an export insurance policy that can help exporters to recover the costs of fulfilling an order.

3. UKEF can also support finance for overseas buyers through the Direct Lending Facility scheme, so they can continue to buy your goods and services.

4. UKEF has over £4bn of capacity to support UK firms exporting to China, as well as significant capacity across other markets.
 

Risk Associated to Sector

Exporters can witness challenges as a result of fresh discoveries of the Covid-19 virus on the packaging. Recently in August, Chinese officials announced tightened controls and inspection requirements on meat and seafood imports after traces of the virus were found on packages of imported frozen food. Inspections carried out on August 12th, also discovered the virus on frozen chicken wings from Brazil, extending concerns about frozen meat as a potential repository of the virus to poultry. Further breakout of coronavirus may disrupt the supply chain and result in the closure of certain business such as restaurants, hotels and other food services business.

Outlook

The COVID-19 pandemic has thrown the focus on boosting the immune system to fight infectious diseases. With cases likely to rise coupled with climate change and nutrient depletion in food staples, functional food is emerging as the best strategy to tackle nutrition-related immune system compromises. A robust immune system plays a key role in tackling unknown pathogens like COVID-19. With no vaccine on cards for some time, the immune systems will need to adapt unaided to fight COVID-19. The market remains in an especially strong position, given the robust R&D investments already sunk into food and nutrition sciences. Tighter food regulations in light of the fact that the COVID-19 emerged from the animal food market; improvements in safety profiles; rapidly ageing, health-conscious population; development of new bioactive substances and modified food ingredients designed to provide a health benefit beyond basic nutrition; a rising wave of consumer self-care and adoption of preventive health maintenance strategies, bode well for the market's growth in the coming years. The organic food revolution wave sweeping through the food industry is likely to drive demand for natural and organically produced bioactive ingredients in functional foods and beverages. Plant and animal sources for nutrient extraction will, therefore, receive increased interest in the coming years. Further, ease in the containment measures would allow the food foodservice industry (especially restaurant), which is likely to drive the demand for food ingredients.

 
II. Investment theme and stocks under discussion (ABF, TATE, HOTC, and HFG)

After understanding the recent trends in the industry, let’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the same, companies’ stocks are evaluated based on Price to Sales.