Shares in Real Good Food (LSE: RGN) are up around 25% today after the confectionery company announced the proposed sale of its sugar business, Napier Brown, for a total cash payment of £34m plus working capital at completion. Clearly, the move has been welcomed by the market — but is it enough to start a sustained comeback that will see the company’s share price return to its three-year high of 71p, achieved on 22 November 2013?
Today’s news comes just weeks after Real Good Food released a profit warning. The key reason behind the disappointing news was weakness in EU sugar market prices, which were severely hurting the bottom line of Napier Brown. And, while the division had returned to profit in the first half of the year, it was expected to post earnings that were significantly below market expectations for the full year. Encouragingly for the company’s investors, though, the rest of Real Good Food’s divisions were trading ahead of expectations, with Napier Brown being the blot on an otherwise improving copybook.
As a result, the sale of the company’s one struggling division, Napier Brown, seems to be a logical move. Not only should it allow the rest of the company to deliver results that are ahead of previous expectations for the full year, it should also mean that Real Good Food moves from a net debt position to a net cash position, with net debt standing at £36.3m as at the end of September 2014.
Furthermore, the sale of a struggling division can be good news for the remainder of any company. That’s because it allows more resources, notably time and money, to be focused on other areas that may offer more appealing medium- to long-term growth potential. And, with the EU deciding to end beet production quotas from 2017 onwards, it appears as though the lack of direct integration with a sugar producer could mean that Napier Brown’s bottom line comes under considerable pressure. As such, the sale to French co-operative sugar group Tereos seems to be a good move for both Napier Brown and for Real Good Food.
Clearly, Real Good Food is some way off its three-year high of 71p, with shares in the company currently trading at about 40p even after today’s rise. However, there appears to be considerable scope for further share price rises, with Real Good Food trading on a relatively low valuation. For example, it currently has a market capitalisation of around £29m, but as at the end of September 2014 had £81m in net assets.
And, while the company was loss-making in its most recent full-year and half-year results (meaning net assets could fall), its potential net cash position and renewed focus on its better performing divisions may allow it to post improved results moving forward, with it having the potential to return to its three-year high over the medium to long term.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.