Bakkavor Group PLC – Demonstrated resilient operational performance despite the challenging market conditions.

Bakkavor Group PLC (LON: BAKK) is FTSE All-Share Company, which deals in freshly prepared food in the United Kingdom. The food categories include Salads, Meals, Desserts and Pizza.

Investment Rationale – Hold at GBX 107.00

• BAKK demonstrated a robust financial position with funding maturities extended to FY25 and availability of £200 million liquidity headroom.
• The cash preservation actions implemented in FY20 has brought the Company in a better financial position for future growth.
• In terms of a technical indicator, 20-day SMA (95.40) is supporting the upside potential.
• Over the past one month. BAKK’s stock price has surged nearly +22.51%, reflecting substantial outperformance against FTSE All-Share index that delivered merely +1.57% return.

Risk Assessments

• The UK market remained volatile as consumer shopping pattern continued to adjust while there is a historically low level of shopping visits. The salads and ‘food to go’ category continued to be impacted.
• The Company could also face supply chain disruption with the resurgence of the Covid-19 cases and Brexit.

Recent News

25 February 2021: Bakkavor appointed Jill Caseberry as an Independent non-executive director, who joined the board on 1 March 2021.

Operational Update for the 52-week period ended 26 December 2020 (as on 16 March 2021)

 (Source: Company Website)

• Although the lifting of the Covid-19 lockdown restriction recovered the demand for fresh and convenient food; however, the total revenue declined 4.9% in FY20 over FY19.
• The operating profit plunged 10.7% in FY20 year-on-year; however, the operating margins improved in H2 FY20 with stabilised trading and strategic restructurings.
• At the end of FY20, operational debt reduced to £333.4 million, reflecting a decrease of £21.4 million with leverage maintained at 2.3 times.
• Given the Covid-19 impact, no dividend was payable for FY20.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

Over the past twelve months, Bakkavor witnessed changes in consumer demand, and hence, managed the business prudently and resiliently given the uncertainties. The short-term outlook remained uncertain due to lockdown restrictions in the UK. Nevertheless, the Company has a robust liquidity position, and it is encouraged by the steady recovery in trading across the business into H2 FY20. It is focusing on growth, customer relevance and a distinctive way of working across the business. It is also broadening the customer base, which underpins the potential growth of the Company. Overall, it is a balanced, robust, and well-capitalised Company which has been taking prudent actions to protect the business and to emerge stronger in the longer-term. Stock 52 week High and Low were GBX 116.80 and GBX 48.50, respectively.

Based on the decent growth prospects, business capabilities, demand recovery and the valuation done using the above method, we have given a “Hold” recommendation on Bakkavor Group PLC at the current market price of GBX 107.00 (as on 22 March 2021, before the market close at 8:20 AM GMT), while we look forward to reinvesting when the Company has some clarity regarding the guidance and short-term outlook.

Topps Tiles PLC – Encouraged by the solid retail sales during Q1 FY21.

Topps Tiles PLC (LON: TPT) is FTSE All-Share listed retailer of tiles, which supplies tiles and associated accessories to both trade and retail customer base for the refurbishment of domestic housing.

On 31 March 2021, TPT announced a trading update for the 26 weeks ending 27 March 2021.

Investment Rationale – Hold at GBX 67.60

• In terms of a technical indicators, 20-day SMA (65.60) is supporting an upside potential.
• Over the past five years (FY15 to FY20), gross margin has remained above 58.5%, reflecting a better position than the industry median.
• Over the past one month. TPT’s stock price has surged nearly +8.63%, reflecting substantial outperformance against the FTSE All-Share index that delivered merely +1.57% return.
• The Group is now debt-free, reflecting a better balance sheet position than the last year.

Risk Assessments

• A higher level of online sales can also increase the delivery cost, while the trading margins are already impacted.
• The Company is exposed to operational risk arising from a loss of customers with increased competition and poor operating performance due to climate change.
• Moreover, the unfavourable economic conditions can lead to a non-recovery of customer debt.

Q1 FY21 Trading Update for the 13-week period ended 26 December 2020 (as on 6 January 2021)

• The like-for-like retail sales surged by 19.9% in the period mentioned above, with decent sales growth across main customer categories, homeowners, and professional fitters.
• The commercial lines have also shown recovery, while the Company is putting efforts to established itself as a market leader over the medium term.
• As of 26 December 2020, the balance sheet looked fundamentally strong with adjusted net cash of £28.5 million and £5.0 million of unused revolving credit facility.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

TPT appeared overwhelmed by the performance of retail business in the first quarter, while certain lockdown restrictions were already in place, keeping the short-term outlook gloomy. Nevertheless, the Company remained well funded, and has a market leading position to achieve its strategic goals. Moreover, with a debt-free position now, TPT expects to emerge from the pandemic in a stronger position when the economy recovery. Looking ahead, the Company is well-positioned for the long term. Stock 52 week High and Low were GBX 69.60 and GBX 27.48, respectively.

Based on the recent retail recovery, debt-free balance sheet, with support from the valuation conducted above, we have given a “Hold” recommendation on Topps Tiles PLC at the current market price of GBX 67.60 (as on 22 March 2021, before the market close at 8.55 AM GMT), while we look forward to reinvesting when the Company has better clarity over the outlook.

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

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