What goes up must come down. It applies in physics and, seemingly aside from Google, generally holds true in investing as well. So, are tepid economic growth and fears over a Brexit-related recession about to put a halt to the staggering 200%-plus five-year returns of packaged food provider Greencore (LSE: GNC) and student housing firm Unite Group (LSE: UTG)?
Greencore, which makes chilled, frozen and ‘ambient’ foods for retailers, has warned that Brexit won’t be good for business due to higher production costs, but the bigger problem facing the company is the continuing price war in the grocery industry. As we saw with last week’s spat between Tesco and Unilever, grocers are under considerable pressure to trim costs, which isn’t good news for suppliers such as Greencore.
The upshot is that Greencore management has adapted to these challenging times with a two-pronged plan for growth. The first step was to make inroads into the growing market for on-the-go foods such as ready-made sandwiches and salads. This is working as the division grew sales by a very healthy 13.1% year-on-year in the first six months of 2016 and now comprises over 40% of group revenue.
The second, more long-term approach to growth has been expanding into the US. It’s still early days in the company’s plan to turn this into a $1bn-a-year business but America now accounts for 15% of overall revenue. And, as new facilities come online and new contracts are inked, Stateside operations are expected to become profitable in the second half of the year.
With long-term growth opportunities in new markets at home and abroad, stable margins despite a tough competitive landscape, and steadily growing profits and dividends, Greencore may not be past its sell-by date just yet.
Good prospects
Brexit will be at the forefront of concerns at the headquarters of student accommodation company Unite Group (LSE: UTG). On top of the recession fears that have gripped all real estate companies, Unite Group also has to worry about whether or not the new PM will seek to lower net immigration levels by cracking down on foreign students in the UK.
With over 400,000 foreigners representing nearly a quarter of all university students in the UK, this should be a major concern for Unite Group. Whether or not the government would truly turn away students who pay significantly higher fees is up for debate though.
Furthermore, the overall number of students in the UK seeking rental accommodation continues to grow and Unite’s agreements with a variety of universities provide a steady pipeline of potential customers. High cash generation from current properties has also proved more than sufficient to fund new building without resorting to significant debt-financed activities.
At the end of June Unite’s leverage ratio was a stable 35% even as it added new developments to the portfolio and increased dividends by 9%. Increasing numbers of university students creating high demand for rental accommodation, a sane level of leverage and high margins lead me to believe Unite Group’s success is no flash in the pan and could continue for a long while.
