Bakkavor Group PLC – Maintained significant liquidity headroom

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

On 8 September 2020, the Company expects to announce its interim results for FY20.

Investment Rationale – Speculative Buy at GBX 55.80

• Over the past four years (FY15 – FY19), the Company’s revenue surged from GBP 1,674.50 million in FY16 to GBP 1,885.90 million in FY19. The Company reported decent growth of 3.02% on CAGR basis.
• The key trading multiples (EV/Sales, EV/EBITDA, Price/Earnings, Price/ Cash Flow and Price/Book) are currently undervalued compared to corresponding multiples of the Food & Tobacco industry.
• Financial Position: Having substantial headroom with available facilities of £562.5 million to manage existing financial covenants without accessing any government supported debt funding.
• BAKK has an annual dividend yield of 3.37%, which has outperformed the benchmark index – FTSE All-Share with an annual dividend yield of 2.61%.

Risk Assessments

• The UK market remains volatile as consumer shopping pattern continues to adjust and evolve 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 Covid-19 cases.

Recent News

18 August 2020: Umran Beba has been appointed as an Independent Non-executive Director and a member of the Remuneration and Nomination Committees. Also, Simon Burke will become Chairman of the Nomination Committee from 19 October 2020.

Summary of Trading Update (as on 12 June 2020)

The key highlights of the performance since the last update on 2 April 2020 were as follows:

• Sales volumes have shown early signs of recovery in all markets and stabilised. Therefore, the like-for-like revenue for the 5 months to May end was merely down by 5% year-on-year.
• The Company has increased the market share as relationships with UK customers remained strong.
• In the US, it is adjusting capacity with lower demand to limit the financial impact.
• In China, consumer confidence slowly returned with lockdown easing.

One Year Share Price Chart

1-Year Chart as of 1 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology

Conclusion

The Company is encouraged by the recent increase in sales volumes while they have been able to expand the market share. It is already a leading player in the UK for four FPF (fresh prepared food) product categories of pizza, desserts, salads, and meals. BAKK is accelerating growth in international markets (US and China) by improving operational efficiency. 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 160.60 and GBX 55.80, respectively. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on Bakkavor Group at the closing market price of GBX 55.80 (as on 1 September 2020) with lower double-digit upside potential based 8.10x Price/Earnings (approx.) on FY20E Earnings Per Share (approx.).

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

*Dividend Yield may vary as per the stock price movement.

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