Cranswick — Softer H1 but fundamentals remain solid

Cranswick — Softer H1 but fundamentals remain solid

Cranswick has witnessed a tougher start to the year, with more uncertain market conditions and softer pricing in key export markets. Capital investment behind the business continues apace, with the move to the new Continental Products facility during the period, and the construction of a new state-of-the-art poultry processing facility well underway.

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Cranswick

Softer H1 but fundamentals remain solid

Consumer

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29 November 2018

Price

2,780p

Market cap

£1,423m

Share price graph

Share details

Code

CWK

Listing

LSE

Shares in issue

51.2m

Business description

Cranswick is a leading British supplier of premium, fresh and added-value products. It supplies a range of fresh pork, gourmet sausages, premium poultry, charcuterie, traditional bacon and gourmet pastry products through retail, food service and manufacturing channels. The UK is its core market.

Bull

Strong innovation pipeline helps fuel growth.

Consumer trend for increased protein consumption is supportive.

UK origin of produce resonates well with health-conscious consumers and minimises Brexit-related issues.

Bear

Significant capex investment dents cash flow in the shorter term. The company had £11m of net debt at end FY17, £20.6m of net cash at end FY18, £2.2m of net cash at H118, and more capex projects announced for FY19-20.

There are execution risks associated with the poultry facility upgrade, as with all large projects.

Competitive landscape remains tough and the UK retail environment is challenging.

Analysts

Sara Welford

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3681 2501

Cranswick has witnessed a tougher start to the year, with more uncertain market conditions and softer pricing in key export markets. Capital investment behind the business continues apace, with the move to the new Continental Products facility during the period, and the construction of a new state-of-the-art poultry processing facility well underway.

Premium and convenience skew is helpful

Cranswick’s product offering is skewed towards the premium end of the market, which continues to witness stronger growth. Convenience is also increasingly important, with ease of preparation the main attribute consumers look for. Cranswick’s exposure to multiple channels continues to serve it well, with customers spanning from the supermarkets to Quick Service Restaurants. This allows the company to spot emerging consumer trends more rapidly and use this information to make innovation more pertinent in the retail business, which still accounts for over 70% of revenue. The company is investing in its facilities to remain relevant and also to ensure it is a price setter by offering superior products to its customers. State-of-the-art facilities help in this regard as they deliver both flexibility and lower cost.

Market conditions are tough

The UK retail environment continues to be challenged, with the big four food retailers continuing to lose share, and the discounters still outperforming the market. Over time, management has skilfully dealt with a tough set of customers, and testament to this is the fact that Cranswick’s own margins with the discounters are no different from with the big four supermarkets. The market is likely to remain tough as consumers are concerned about inflation, and Brexit uncertainty is unhelpful, particularly in terms of wage inflation. In addition, the Chinese pork market and industry is currently being disrupted by outbreaks of African swine fever. We expect the seasoned management team to navigate these conditions.

Valuation: Trading at a premium

Trading on a consensus FY19e P/E of 18.6x, Cranswick continues to be valued at a premium to the meat processing and food manufacturing peer group. Bolt-on acquisitions remain a possibility given the group’s net cash position, but management has demonstrated a disciplined approach and a willingness to expand the business via capex projects in the absence of suitable acquisition targets. Volatility is likely to remain a feature due to the agricultural nature of Cranswick’s raw materials. Increased automation will help to offset some wage inflation.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/17

1,245.1

75.5

120.9

44.1

23.0

1.6

03/18

1,464.5

92.4

145.0

53.7

19.2

1.9

03/19e

1505.26

94.65

149.51

56.6

18.6

2.0

03/20e

1577.85

100.36

158.09

60.0

17.6

2.2

Source: Thomson Reuters I/B/E/S

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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