Overview
Greencore Group plc (GNC) manufacturers, distributes and markets convenience foods and ingredients. The company currently operates across two segments: Convenience Foods, and Ingredients & Property. It mainly supplies products to multiple and convenience stores. Greencore markets its products under the brands of Bisto, Heinz, Little Dish, Munch, Pandora Pickles, Robert’s, Ross’s, Sushi San, Sutherland Deli, and WW Chilled. The company operates the UK.

Financial Highlights (H1 FY2019, £million)

(Source: Interim Report, Company Website)

The company’s reported revenue from continuing operations decreased by 4.6 per to £701.4 millionas compared to £734.9 million in H1 FY18, due to the impact of site disposals and exits. Pro Forma revenue growth stood at 5.4 per cent. Adjusted EBITDA from continuing operations increased by 0.2 per cent to £62.5 millionagainst the £62.4 million in H1 FY18, while EBITDA relating to discontinued operations stood at £9.1 million. Adjusted operating profit climbed by 0.9 per cent to £44.7 millionfrom £44.3 million in H1 FY18, while adjusted operating margin was 6.4 per cent. The group’s operating profit was £41.3 million, an increase of 144.4 per centas compared with the H1 FY18 data. Adjusted profit before tax surged by 17.1 per cent to £37.7 millionagainst the £32.2 million in H1 FY2018, while group’s profit before tax increased to £5.7 million. Adjusted earnings per share rose by 16.4 per cent to 6.4 pence per share.The company announced an interim dividend per share of 2.45 pence, an increase of 11.4 per cent against the 2.20 pence reported in H1 FY18. Free cash outflow stood at £19.4 million in H1 FY19, driven by the seasonal working capital outflows in the continuing business and the impact of United States cash flows. At the end of H1 FY19, net debt decreased from £522.2 million to £284.1 million. The company’s Net Debt/EBITDA leverage as per financing agreements stood at 1.9xas compared to 2.5x at the end of March 2018 and 2.3x at the end of September 2018.  ROIC (return on invested capital) was 14.6 per cent for the 12 months ended 29 March 2019 against 9.7 per cent reported last year.

Share Price Performance

Daily Chart as at May-23-19, before the market closed (Source: Thomson Reuters)

On 23^rd May 2019, at the time of writing (before the market close, GMT 8:47 AM), GNC shares were trading at GBX 217, down by 1.50 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 231.60/GBX 160.90. The company’s stock beta was 1.59, reflecting higher volatility as compared to the benchmark index.

Valuation Methodology

*All forecasted figures and Peer information have been taken from the Thomson Reuters.
 
Key Risks
Strategic risks- Competitor activity and Growth; Commercial risks - Changes in consumer behaviour and demand, Key customer relationships and grocery industry structure, Raw material and input cost inflation; Operational risks - Food industry and environmental regulations, Product contamination, Health and safety, Disruption to day-to-day group operations, Recruitment and retention of key personnel, Labour availability & cost, and IT systems and cyber risk; Financial and other risks - Interest rates, foreign exchange rates, liquidity and credit, Employee retirement obligations, and Taxation.

Conclusion
GNC delivered decent growth in H1 FY19. The group is presently focused on a dynamic and vibrant food market in the United Kingdom, with an increase in profits and a stronger balance sheet. The company sees significant growth opportunity to broaden its intention in channels, capabilities and categories. The Group continues to believe that the risks from Brexit are manageable in the medium-term while acknowledging that the near-term challenges associated with a disorderly exit remain uncertain. Based on the strong growth prospects of the company and the valuation done using the above method, we have given a “Speculative Buy” recommendation at the closing price of GBX 220.30 (as on May-22-19) with single-digit upside potential based on 14.84x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*The Speculative Buy recommendation is valid for the current price as covered in the report (as on May -23-19).

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