Panmure Gordon analyst Damian McNeela predicted the deal could contribute an additional £2.5M share of joint venture net income in the financial year 2016. Hilton was expected to contribute its expertise during the design and construction of the plant but not incur capital costs.
“We believe this is a positive development and bodes well for further expansion opportunities with Australia’s largest retailer,” said McNeela.
“This is clearly a positive development and is testament to Hilton’s success in operating and managing the Bunbury facility,” he added.
Operational in 2015
The new plant – due to become operational in 2015 – is expected to supply 214 Woolworths stores in the state of Victoria. Full capacity is expected to be reached in 2017.
This more than doubles the number of stores supplied from the joint venture’s first production site in Bunbury, near Perth in Western Australia.
Together the two factories will supply about one third of Woolworths’ retail stores.
The latest deal could point the way to further expansions of the joint venture agreement.
Panmure Gordon repeated its ‘buy’ recommendation on Hilton Food Group’s stock and increased its target price to 450p from 415p.
City analyst Shore Capital also welcomed the move. Its analysts Clive Black and Darren Shirley described the deal as another significant step forward for the business.
“Hilton has gradually, effectively and sensibly developed its business in our view, demonstrating resilience in the most challenging of market conditions through its in-the-main, single client per market model, whereby it works very closely with its retail partners,” they said.
Hilton said the deal was subject to government approvals and the finalisation of construction and tenure agreements.
Australia’s largest retailer
The firm agreed the joint venture with Australia’s largest retailer this January.
The joint venture company – Woolworths Meat Co – is 50% owned by a Hilton subsidiary, Hilton Foods Asia Pacific, and 50% by Woolworths.
Speaking in May, Graham Jones, Panmure Gordon’s executive director of equity research, predicted Hilton would increasingly benefit from the geographical spread of its business.“With household incomes remaining constrained across Europe and meat prices remaining high, we believe conditions remain challenging,” said Jones.
“However, Hilton benefits from a broad geographic reach, and we expect another year of steady growth, before an acceleration to double-digit earnings per share growth in 2014.”
In a management statement for the 28 weeks to July 14, Hilton Foods admitted its business had been affected “by well-publicised industry issues”– a reference to the horsemeat crisis – while economic conditions had remained challenging and consumer spending constrained.
The statement also repeated Hilton management’s commitment to explore business opportunities in new and existing markets.
Hilton will post its half-year results on September 10.