After a failed expansion into the American market, Greencore (LSE: GNC) has refocused on its core operations. The convenience food maker experienced considerable setbacks over the past two years, both financial and structural. Now that the problems are over, I believe that a strong company remains, providing investors with an opportunity to buy at a discount.
Back story
The stock hit trouble when it acquired the American company Peacock Foods, in late 2016. Since then it has been in decline. Pronounced problems came to light at the end of 2017: in three months the stock’s value more than halved. The company suffered a plethora of issues, including a dysfunctional IT system, inefficient acquisitions and the loss of a major client. Proof of its failings came in the form of a profit warning not long after, taking the stock to its lowest level since 2013. Despite a recent rally, spurred by a new strategy, the share price still lags 15% behind its index (the FTSE 250) at the time of writing.
Comparable in magnitude to its failings is the firm’s subsequent turnaround. Late 2018 saw Greencore sell its troubled American arm for US$1bn to Hearthside Food Solutions, a 45% return on investment in two years. This remarkable sale brought an end to the company’s woes and signalled the beginning of a new business model. A clear dedication to shareholders is visible in management’s actions: half of the proceeds from the American sale are to be distributed as a tender offer. On top of this, £293m has been committed to shoring up the balance sheet, pushing Debt/EBITDA below 2.
A return to basics
With a return to its core business, Greencore promises to outperform in the future. As of 2019, the UK and Ireland are its sole customer markets. Business is primarily conducted with long-term clients (for instance, in the sandwich division 90% of contracts run for over three years).
This stability means extrapolation of past performance provides a reasonable estimate of the future. Whilst geological expansion clearly failed, at home Greencore has grown successfully. Pro Forma revenue figures provide a good illustration: the adjusted metric considers only UK and Irish operations, excluding divisions that the company divested from in 2018 and ignores extraordinary costs. Under these criteria, revenue grew by 8.7%. In comparison, its close competitors Premier Foods, Kerry Group and Bakkavor grew revenue by 3.7%, 3.1% and 2.7% respectively. Outperformance at the top end indicates a superior ability to grow. Within the £40bn UK convenience food market, Greencore is free to take full advantage of this outsized growth.
The company’s dividends mirror financial stability. Yields have averaged 2.7% over the past five years, a task management has shown considerable commitment to and, more importantly, has the financial backing to maintain.
In the context of a favourable US exit and continued outperformance at home, a 15% discount to the FTSE 250 looks like an oversight to me, rather than a reasonable valuation. Add in stable dividends and a market-leading domestic division, and you have a worthy investment in my opinion!
