Cranswick was back on the pork acquisition trail last week, snapping up Dunbia’s Northern Irish pig slaughterhouse. The supplier’s most recent deals had seen it diversifying into poultry, taking over Benson Park in 2014 and Crown earlier this year.
What does Cranswick see in a pork business with razor-thin margins? Can the deal help ease the inflationary winds swirling around Brexit and boost exports to China?
The acquisition of Dunbia Ballymena is Cranswick’s first off the British mainland, giving it a significant presence in Northern Ireland and access to pigs across the border in the Republic.
CEO Adam Couch said the transaction was important to secure the future of the Dunbia site - which has been for sale for 18 months along with the wider Dunbia group - as Cranswick was already its biggest customer.
The facility in Country Antrim employs 360 staff and processes 400,000 UK farm assured pigs a year, which equates to about 18% of Cranswick’s existing processing capacity in Yorkshire and Norfolk.
Revenues in the year to 29 March 2016 were down 9% year on year to £72.4m, with details of the bottom line not yet available. However, operating margins at the business are slender at 1.3%, compared with 5.5% at Cranswick.
Investment firm Liberum sees scope to lift Dunbia’s margins in line with the rest of Cranswick within two years through building capacity, maximising carcase value and exporting more to China.
Analyst Sophie Jourdier says: “Cranswick will be able to leverage off its strong existing relationships in UK pork in the Northern Irish market, which we expect to translate into greater or additional contracts.”
HSBC analyst Damian Mcneela points out that the site is running below capacity, with room to take the number of pigs processed from 8,000 a week to 10,000. “The site is profitable but has not been able to operate at a steady state given the issues facing Dunbia more widely,” he adds. “Modest additional investment to increase chiller capacity would allow throughput to increase to 12,000 pigs a week. Acceleration of the current plan to improve performance combined with the application of Cranswick best practice should deliver improved profitability.”
The 6p-8p per kilo estimated difference in Red Tractor Farm Assured pig prices in Northern Ireland, compared with higher prices in Britain, could also give Cranswick an advantage and help shore up profits, an industry source says.
“If the retail price is the same and the buying price is not, then there is probably a decent margin to be had,” adds Mick Sloyan, strategy director for AHDB Pork.
However, a source in Northern Ireland says the true price balances out once haulage costs, kill charges and weight-related bonuses are factored in, alongside the fluctuations in seasonal supply and demand.
Couch insists a bigger driver for the deal is much further away from home. He says the potential for additional exports to China would “catapult” Northern Irish sales.
Cranswick already sells fifth-quarter pork cuts, such as trotters, heads and offal, to the Far East through intermediaries in Hong Kong and Singapore. However, Northern Ireland is still awaiting final approval from the Chinese certification agency CNCA after it gave the country the provisional green light in November 2015.
Opening up China will also help Cranswick offset the rising costs all food suppliers are battling in the wake of Brexit and the 15% drop in the pound. “Unlocking China would be the single best mitigation against inflationary pressures,” Couch says.
The additional capacity from Dunbia will also help as buyers look to buy more British pork as opposed to more expensive imported pigs. However, with the UK only producing around 40% of its own pork, increasing domestic production will take time and money, Couch admits.
“We hope to ramp up production to take advantage of the weak pound but that is expensive and a long way off,” he says.
One of the Brexit-related uncertainties for the tieup is what a trade deal will mean for the open border between Northern Ireland and the Republic. About 500,000 pigs a year are currently sent from the Republic of Ireland to Northern Ireland to be slaughtered and sold.
Sloyan warns there may be difficulties if trade negotiations don’t go to plan. “Cranswick has taken a view that it will all be fine and the border will remain open and free from tariffs but that is by no means certain,” he says.
The unpredictability of the Competition & Markets Authority (CMA), which is currently scrutinising Ranjit Boparan’s rescue of Bernard Matthews, could put a spanner in the works given Cranswick’s UK pork market share is approaching the 25% threshold needed to spark an investigation.
Couch is unconcerned and points to the weight of competition from UK operators, including larger rival Tulip, as well as Karro, and the fact that the majority of pork sold in the country is imported.
Cranswick may give more details of its plans for Dunbia Ballymena in its first-half results next week. Analysts at HSBC expect strong volume growth of 10% to be partially offset by deflation of 5%, with revenues to rise 11% to £590m and a 12% jump in adjusted operating profit to £35.7m.
The latest bolt-on looks to be a shrewd move by Couch to bolster this already impressive growth. And with shares up 16.7% in 2016 so far - valuing the group at £1.1bn - shareholders will hope the potential of China will carry the momentum into the new year.
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