Greencore growth to be ‘driven by US business’: City

09-May-2013 - Last updated on 10-May-2013 at 11:43 GMT

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Greencore’s boss Patrick Coveney is likely to see greater business growth in the US than the UK, said Investec

Chilled convenience food firm Greencore is likely to see more growth from its US business than its UK operations this year, according to City analyst Investec.

Investec’s analyst Nicola Mallard said the UK environment was proving more challenging for the firm to achieve volume growth this year. But the group’s US operation was now “on a stronger footing”.

Mallard added: “The UK grocery market has slowed this year and this will influence the UK operations’ performance, so, for the half and full year, we expect the growth to be driven more by the US.”

‘Encouraging signs’

The US business was expected to produce its first profit in the financial year 2013, and there were “encouraging signs” that this number should continue to grow.

Greencore profits are typically based in the second half of the year and the trend was likely to be accentuated in 2013, said Mallard. The firm is due to report interim results on May 21.

“We anticipate modest first half progress, but with easier comparatives in the summer months and new business wins in the US contributing,” said Mallard. “We expect a stronger second half performance to deliver about 10% full year profit before tax progress.”

Investec said Greencore’s US business now had an improved focus both in terms of product categories and customer mix. Also the phased integration of the new Starbucks business was now complete.

The analyst’s comments followed the high-profile failure of Tesco’s US Fresh and Easy Business. Last month the retail giant confirmed plans to close its troubled chain of 199 Fresh & Easy stores at a cost of £1.2bn.

Net debt reduction

Meanwhile, Investec said net debt reduction remained a priority for the group. Mallard predicted net debt would fall this year to about 2.4x earnings before interest, tax, depreciation and amortisation.

Investec retained its ‘buy’ advice on Greencore’s stock.

Panmure Gordon analyst Damian McNeela predicted that the horsemeat saga was likely to exacerbate the challenging consumer environment and tough comparatives experienced in the first half of this year.

McNeela forecast that group revenues for the first half would rise by 1.4% to £575.9M and that adjusted earnings per share would rise by 1% to 5.56p.

Convenience food revenues were predicted to rise by 2.5% to £546M but operating profits were likely to be flat at 5.8%, resulting in 3.2% adjusted operating profit to £31.7M, he added.

“We expect that, in the absence of any further fall out from the horsemeat saga, improved performance in its cakes and desserts business and further progress in its US business, Greencore should report an acceleration in revenue growth in the second half of 2013,” said McNeela.

That should contribute to an improved operating margin performance, leading to a forecast 10% growth in adjusted profit before tax to £58.3M for the financial year 2013.

“Greencore, we believe, continues to be well placed to capitalise on the long-term trends towards convenience food,” said McNeela. “The shares have risen by 10% year-to-date underperforming the UK market by 2%.”

While the shares continue to trade at a discount to its peer group, McNeela said the discount was undeserved. Greencore should trade at least in line with its peers.

Panmure Gordon repeated its ‘buy’ recommendation on the firm’s stock and raised its price target to 125p.