Bakkavor Group PLC

Bakkavor Group PLC (BAKK) is a London-headquartered leading provider of freshly prepared food in the UK, which makes ready to eat, ready to reheat or ready to cook products and seeks to develop and produce innovative food for a wide variety of occasions and budgets. In China, the company supplies international and local foodservice operators, while it works with leading grocery retailers, focusing on their own label brands, in the UK and US, as it seeks to exploit significant opportunities in the US and China. The operations of the group are differentiated in two geographical segments, namely UK and International.

Financial Highlights (H1 FY19, £m)

 (Source: Company Filings)

As like-for-like revenue for H1 2019 in the UK increased by £5.1 million to £772.2 million and like-for-like revenue in International segment increased by 12.7% to £105.7 million in H1 2019, like-for-like revenue of the group increased by 2.0% from £860.9 million in H1 2018 to £877.9 million in H1 2019. Due to the relative weakening of Sterling and the net impact of acquisitions and businesses closed or sold, revenue increased by £13.1 million, or 1.4% to £923.0 million in H1 2019 from £909.9 million in H1 2018. Due to an increase in depreciation, a lower trading performance and the start-up losses for the new sites, operating profit before exceptional items and start-up losses for new sites was £50.7 million in the period, while reported operating profit decreased by £24.8 million, from £54.1 million in H1 2018 to £29.3 million in H1 2019. Adjusted EBITDA pre-IFRS 16 decreased by £5.1 million, or 6.5%, to £73.5 million in H1 2019 and adjusted profit before tax pre-IFRS 16 was reported at £20.6 million with an adjusted profit of £18.1 million for the year. Adjusted earnings per share have decreased to 5.9p in H1 2019 from 7.4p in H1 2018 as adjusted earnings for the period have decreased by £8.7 million to £34.4 million. Basic earnings per share decreased from 7.0p for H1 2018 to 3.0p in H1 2019 as profit for the period decreased by £23.3 million to £17.2 million in H1 2019 from £40.5 million in H1 2018.

Share Price Commentary

Daily Chart as at 05-November-19, before the market closed (Source: Thomson Reuters)

On 5 November 2019, at the time of writing (before the market closed, GMT 2:43 pm), BAKK shares were trading at GBX 123.00, up by 2.84% against the previous day’s closing price. Stock's 52 weeks High and Low are GBX 172.60/GBX 91.50. The company's stock beta was 0.38, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £695.79 million, with a dividend yield of 5.02 per cent.

Conclusion
Fluctuation in the price and availability of raw materials, packaging materials and freight can impact the cost base and margin of the group, the threat of which has substantially risen in recent times due to various macropolitical headwinds. Brexit presents a risk as historically the group has employed a material number of citizens from elsewhere in the European Union and the company competes with other manufacturers for good and reliable employee. Therefore, manpower scarcity and higher labour costs could affect the business and future profitability.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the current price of GBX 123 (as on 5 November 2019, before the market closed), while we look for any upcoming catalysts in the near term.

De La Rue PLC

De La Rue PLC (DLAR) is a Basingstoke, United Kingdom-headquartered company that works with governments, central banks and commercial organisations to produce banknotes, fight illicit trade and counterfeiting, protect brands and reputations and supply key security components to the identity industry that underpin the integrity of trade, personal identity and the movement of goods. The group operates in the fundamental areas of the cash supply chain, product authentication and citizen identity needs, and its products and services help countries to trade, economies to grow, companies to sell and people to move securely around the world. The operations of the group are differentiated in three operating segments, namely Product Authentication and Traceability (previously Security Products), Identity Solutions, and Currency.

Trading Update
In a trading update from 1 April 2019 to 30 October 2019, the company reported that financial year 2020 adjusted operating profit would be significantly lower than the market expectations and it expects H1 FY 2020 adjusted operating profits to be low-to-mid single-digit millions. On 26 November 2019, the company would report its results for the first half of FY 2020, wherein a detailed review of the business would be provided.

Financial Highlights (FY 2019, £m)

 
(Source: Company Filings)

Excluding the impact of IFRS15, group revenue increased by 9% on an excluding paper basisand 12% on an IFRS basis, while benefiting from the impact of the adoption of IFRS 15, group revenue grew by 14% on a reported basis to £564.8 million (FY18: £493.9 million) and rose by 12% to £516.6 million excluding paper (FY18: £461.4 million). Adjusted operating profit excluding paper increased by 6% to £60.1 million (FY18: £56.9 million). Due to the recording in FY19 of an £18 million credit loss and the impact of the gain in the prior period relating to the change in indexation methodology on the UK pension scheme, IFRS operating profit on a reported basis was £31.5 million and substantially lower than FY18 (FY18: £123.0 million). IFRS basic EPS was down by 80% at 18.8p (FY18: 93.7p) as profit for the year attributable to shareholders declined to £17 million against £93.6 million in the previous year, while basic adjusted EPS excluding paper was up by 12% at 42.9p as compared to the prior-year figure of 38.2p. ). Net debt increased to £107.5 million from £49.9 million at 31 March 2018 and cash generated from operating activities was an outflow of £4.6 million (FY18 inflow of £73.5 million).

Share Price Commentary

Daily Chart as at 05-November-19, before the market closed (Source: Thomson Reuters)

On 5 November 2019, at the time of writing (before the market closed, GMT 11:17 am), DLAR shares were trading at GBX 154.8, down by 5.14% against the previous day’s closing price. Stock's 52 weeks High and Low are GBX 513.32/GBX 131.60. The company's stock beta was 1.02, reflecting the same volatility as compared to the benchmark index. Total outstanding market capitalisation was around £170.32 million, with a dividend yield of 15.32 per cent.

Conclusion
The company had to face significant setbacks in the past year, including an £18 million hit after the Venezuelan central bank failed to pay its bills, an investigation by the Serious Fraud Office opened into the group and loss of the contract to print British passports to a French company. In the latest trading update, while the new Chief Executive Officer announced a review of the business, he gave a second profit warning this year, which caused more than a fifth to be wiped off the value of the group, as profits would be hit by heightened competition in banknote printing. Longer-term threats could include lower barriers to manufacturing, the emergence of cashless societies and the growth of e-commerce, along with evolving industry standards and changing technology, which might lead to failure to win or renew a material contract.

Based on the above rationale, we have given an “AVOID" recommendation at the closing price of GBX 163.20 (as on 04 November 2019).

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