Soaring sales and cash appease investor fears over £695m bond

We knew Ranjit Singh was doing a great job with his 2 Sisters Group when he won The Grocer Cup last month at the IGD Awards (see picture). But until last week’s results were announced, we didn’t know quite how good.

Defying rising feed costs and lower consumer confidence, parent company Boparan Holdings posted a 13.4% increase in sales and an 11.9% increase in EBITDA in the year to 28 July 2012 - while simultaneously generating almost £200m in additional cash, to help reduce net debt by £121.3m.

It’s an impressive performance, and music to bondholders’ ears, after the group signed up to a stretching £695m bond -on not exactly favourable terms - to fund the ambitious purchase of Northern Foods.

As Shore Capital analyst Clive Black said: “There was considerable chatter, scepticism and some genuine concern about the leverage levels when 2 Sisters took on Northern Foods, but given last week’s results, “such issues have materially dissipated”, he claims.

Now, industry pundits predict the hard work is set to pay off, as the ratio of net debt to EBITDA declined from 3.85x to 2.8 - paving the way for 2 Sisters to refinance on better terms. So just how has he managed it? And what’s next?

2 Sisters says top-line sales growth - rather than simply recouping higher input costs from customers - has driven both its sales performance and increase in EBITDA. “Our focus on putting the customer at the heart of everything we do means we have benefited from new business with both existing and new customers,” said Singh, announcing the results.

Sales growth was strong in all three divisions: in the core poultry division, like-for-like sales were up 10.1%. And with new contract wins for 2013 - including a significant Sainsbury’s poultry supply contract - the company seems well placed for further growth, though Singh noted an “essential” need to recover “further significant increases in feed prices” since the start of the new financial year.

In the chilled division - comprising Northern’s ready meals, sandwich and salads operations - like-for-like sales were up 10.5%, with a particularly strong performance in Q4 as new products were developed for the Queen’s Diamond Jubilee, Euro 2012 and the Olympic Games. However, Boparan announced last month the closure of the Brookes Avana site in Leicester in April 2013, and last month, the OFT ruled it must sell the Avana Christmas pudding operations.

Sales even improved in the struggling branded division - up 6.8% yoy, but 18.1% in Q4, thanks to “higher promotional activity” and “an improving performance in frozen”.

But it’s not just sales and promotions that have been key: Singh said the integration of the Northern and Brookes Avana businesses had generated synergies “at the top end of our forecast range” while the parent company kept a tight grip on capex as it “continued to embed our customer and cash culture”.

One poultry expert spoked admiringly of the level of detail Singh’s team had shown. “He has gone into Northern Foods and challenged everything, even the volume and price of biscuit crumbs it receives as co-products.”

“Boparan does it his way and his approach works by only having people around him who do it his way,” a second poultry source adds.

Singh has promised to continue to focus relentless on reducing the group’s debt pile, which is likely to stand him in good stead for future investments.

The aim is to bring EBITDA down from 2.8 times to 2-2.5 “in the medium term”. This range is considered “investment grade metrics”, according to a spokesman. That will be a key consideration to investors, “further reducing the leverage alarm bells,” adds Black.

So, is Boparan home and dry? Singh is cautious. “Trading conditions are very challenging, with high food commodity inflation,” he notes. But his formula in 2013 will be more of the same: “to work with our customers, invest in our brand, in innovation and our people, and drive efficiency.”