Meat producer Cranswick admitted today it was feeling the effects of changing consumer shopping habits and the rise of the discounters and convenience stores – but its share price is currently 28% up year-on-year and rose another 5.4% today after solid first half results.
Investec reacted to Cranswick’s first half results by restating its buy recommendation and increasing its price target from 1390p to 1615p – there are currently no brokers with a sell recommendation on the stock despite its recent rises.
In that sense the company is a good example of a food supplier in a nominally tough market (pork production in the UK remains comparatively expensive and it has historically been beholden to the big supermarkets) that is managing to thrive despite the current conditions.
And Cranswick is achieving all this against a marked slowdown in revenue growth.
The morning the company announced a slight fall in first half revenues from £483.5m to £481.5m (mainly due to falling pork sales), but this translated into an 11.4% increase in profit before tax to £25.8m and earnings per share rising by 7.3% to 41.1p.
This was largely impacted by a significant fall in pig prices, which has constrained revenues but helped support the company’s underlying margins.
But Cranswick’s solid performance owes just as much to its recent focus on diversification as it does to fluctuations in pig prices.
The company’s October acquisition of poultry producer Benson Park is a clear illustration of the strategies Cranswick has employed to cope with the changing market.
The buyout will enable Cranswick to diversify from its core pork business by moving into poultry, while maintaining its concentration on high-end premium products and focussing on quality rather than dropping prices to boost volumes.
Investec calls the deal “a good move to diversify the protein focus and channel mix” – and it is one that replicates Cranswick’s move into pastries alongside Yorkshire Baker in 2013 (today the company said pastry sales were “significantly ahead” of last year).
Despite the relatively high cost of pig rearing in the UK, Cranswick has been able to significantly grow its export business in recent years through its focus on the quality end of the market. Though EU exports fell (due to falling pork prices), volumes in China and Australia were significantly higher, with management taking of one third of volumes from its two primary processing facilities being shipped overseas.
Cranswick has also looked to innovate in its existing categories, with NPD particularly prevalent in cooked meats (which grew by 8% in the first half) and further innovation focussed on the growing foodservice/food-to-go markets.
Shore Capital’s Clive Black says this all adds up to a company in good shape despite the rapidly changing UK food retail market. He said: “We have been consistent in our view that Cranswick represents a core holding in the UK small-mid cap arena, with a well invested industry leading manufacturing/processing infrastructure, a talented and experienced management team, excellent cash generation and very robust balance sheet”.
The underlying theme of Cranswick’s recent success has been in its ability to broaden its customer base by responding to changes in customer and consumer demand.
With Cranswick’s “robust balance sheet” there is no reason to believe its large-scale investment will stop at Benson Park.
The real question seems to be where Cranswick will invest next rather than if it will – strategic acquisitions to support its efforts to grow in the foodservice space and internationally look a good bet.