US woes cause 24% collapse at Greencore

Since entering the US market in 2008, convenience foods maker Greencore (GNC) has grown rapidly to the point that American consumers now generate almost 40% of the company’s £2.3 billion in annual revenues.

This growth included the biggest deal in Greencore’s history in 2016 when it snapped up Illinois-based Peacock Foods and its long-standing relationships with consumer goods giants including Tyson Foods, KraftHeinz and Dole.

Unfortunately for Greencore and its investors, the Dublin-based company now appears to be feeling the effects of indigestion after a profits warning today was accompanied by an admission that its US business needs restructuring.

Patrick Coveney, who has overseen the US expansion since becoming chief executive in 2008, will now take a direct role in the running of the US business and look to spend approximately half his time out there.

He will have plenty to do in terms of winning back the support of investors after shares lost a quarter of their value today to stand at their lowest level since October 2013.

Source: interactive investor            Past performance is not a guide to future performance

Greencore’s supporters have included Investec Securities, whose analyst Nicola Mallard previously had a price target of 263p. That’s now under review after the company, whose brands range from Bisto yorkshire puddings to Munch sandwiches, downgraded earnings per share (EPS) guidance for 2018 to between 14.7p and 15.7p.

That’s weaker than the 15.7p to 16.6p previously forecast as Greencore highlighted the negative impact of some under-utilised sites from its original US estate. The timing of new business contributions, and the current GBP/USD exchange rate, will also reduce the expected rate of US profit growth.

In addition, there will be one-off costs of about £3 million relating to the US network restructuring and the overhaul of management in the region, where the company operates from 14 manufacturing sites.

Among changes, current fresh production at its Rhode Island facility will cease later this month, but with the facility retained for potential repurposing.

On a more encouraging note, Peacock’s consumer packaged goods business and UK operations continue to perform in line with expectations., even though the latter has experienced some weather-related issues in recent weeks.

Greencore pointed out today that the acquisition of Peacock, which it part funded through a rights issue, had “greatly enhanced the scale, operational capabilities and financial performance” of its US business.

It now plans to align the manufacturing network of approximately 2.5m square feet with “current and prospective commercial opportunities”.

At the current shares price – 137p – and on the company’s downgraded EPS estimates, Greencore trades on a projected price/earnings (PE) multiple of 8.7-9.3x versus 11.2x prior to this warning.

The prospective dividend yield, assuming the payout is held, is about 4.3%. In annual results last November, Greencore pegged its dividend at 5.47p after EPS dropped 3.8% to 15.4p.

As well as the challenge of the Peacock integration, it had to contend with a 3% rise in raw material and packaging costs, plus the inflationary impact of a weaker sterling on imported ingredients. Labour inflation in the UK was approximately 4% in the year.

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