Cranswick Share Blog – Interim Results Year Ending 2020

Cranswick have now released their interim results for the year ending 2020.

Revenues increased by £50.8M, depreciation was up £5.8M and other costs of sales grew by £34M.  There was a £3.7M positive movement in the value of the pigs to give a gross profit £14.7M higher.  Selling and distribution costs were up £3.9M, share based payments increased by £400K, the amortisation of acquired intangibles grew by £500K and other admin expenses were up £4.2M which meant that the operating profit was £5.7M higher.  Finance costs were up £800K, and tax charges increased by £900K to give a profit for the period of £37.M, a growth of £3.9M year on year.

When compared to the end point of last year, total assets increased by £175.7M driven by a £92M growth in property, plant and equipment, a £37.1M increase in intangible assets, a £29.3M growth in receivables and an £11M increase in inventories.  Total liabilities also increased during the period due to a £74.1M growth in financial liabilities, a £46.5M increase in lease liabilities and a £26.8M growth in payables.  The end result was a net tangible asset level of £369.9M, a decline of £11.5M over the past six months.

Before movements in working capital, cash profits increased by £9.4M to £67.3M.  There was a cash outflow from working capital but tax payments increased by £6.2M to give a net cash from operations of £40.7M, a growth of £1.7M year on year.  The group spent all this on an acquisition of £41.3M and then some £55.7M of capex on tangible assets.  They also paid out £4.1M in lease payments to give a cash outflow of £57.6M before financing.  The group took out a net £73.3M in borrowings and paid out £15.6M in dividends to give a cashflow of £600K and a cash level of £21.1M at the period-end.

Total fresh pork revenue increased by 15% reflecting stronger wholesale and export demand through the first half of the year with the number of pigs processed during the period increasing by 8.8%.  Retail sales were also modestly ahead.  The group invested £4.2M across the processing facilities and £800K on upgrading the refrigeration systems at the Hull facility.

Total export revenue increased by 65%. Exports to the Far Eastern markets were 94% higher reflecting strong demand from China following the outbreak of African Swine Fever in the region.  Shortly after the period-end the Norfolk facility was granted full Chinese export approval which means that all facilities now have full approval leaving them well placed to develop and grow this revenue stream.

The Chinese pig price increased 89% by the end of September and pork meat imports had increased by 72%.  It is anticipated that restocking of the Chinese herd may take several years.  EU pork prices remain high, supported by strong export demand from China.  ASF outbreaks continue in domestic pigs in Eastern Europe but the reporting rate of cases in the wild boar population in Belgium continues to decline, although the group is still on high alert for any potential outbreak in the UK which would be very detrimental to the industry.  The UK pig price increased by 12% but was modestly lower when compared to last year.

Convenience revenue increased by 5.1% reflecting growth in continental products offset by lower cooked meats revenue. Like for like convenience revenue was up 0.5%. Cooked meats were slightly down on the same period last year as the market faced a strong summer season last year and lower promotional activity this year.  The group gained market share due to an increased share of promotional activity by one of their key customers, strong growth with a discount customer and new business launched with a premium retail customer part way through the period.  They invested £19.8M across the cooked meats facilities including the commissioning of the new Sutton Fields £13.9M extension.  Investment also continued in Milton Keynes to accelerate additional business with the site’s dedicated customer which comes on stream in the second half.

Continental revenue growth was underpinned by a strong performance from the site’s lead customer particularly across corned beef, olive and pre-pack categories.  The new Bury facility is now performing in line with expectations.  Further investment in the automation of olive packing has increased throughput, creating capacity to accommodate future volume growth.  During the period the freehold site at Trafford Park was sold for £3.2M, realising a profit of £400K.

Gourmet products revenue was in line with last year, with strong growth in pastry and bacon offsetting lower sausage revenue which reflected tough comparatives due to the extended BBQ season last year.  Some business was lost but this was mostly offset by new contract gains.  Strong demand for festive garnish ranges is expected to drive sales over the Christmas trading period.

Strong volume growth in bacon reflected new food service business coming on stream during the period and increased promotional activity with a key customer.  This momentum was partly offset by downward pressure on selling prices from one retail customer.  Pastry revenue grew strongly during the period supported by new contract wins and a strong innovation pipeline. New ranges supplied to the anchor customer performed ahead of expectations.  Towards the end of the period a new product range was launched across a number of outlets with a national coffee shop chain.

Poultry revenue increased by 5% with a more moderate growth profile compared to recent reporting periods primarily reflecting the annualisation of new business wins in the cooked poultry category.  Their fresh chicken business continued to operate at full capacity ahead of the move to the new facility.  The customer base was realigned with new business launched with the anchor customer balancing the rationalisation of the customer base.  Above average temperatures adversely affected broiler growing performance and subdued wholesale pricing continues to impact the performance of the business. 

Investment in the new £74.8M poultry primary processing facility which will more than double existing capacity is progressing to plan with £24.1M spent on the project.  The commissioning process started shortly after the period-end and is due to be completed by the year-end.  Investment in the upstream agricultural operations also continued and a second feed mill in Suffolk came on stream shortly after the period-end.  Cooked poultry revenue growth reflected the launch of new business with a third national grocery multiple and the introduction of a new product range with one of the existing customers during the period.

The share of loss of the joint venture of £100K represents the ongoing start up losses of White Rose Farms.  The business is part of a longer term strategy to secure commercial pig supply and these losses are in line with the plan. 

Although conditions in the core UK market remain extremely competitive, the outbreak of African Swine Fever in their Far Eastern markets has created the opportunity to increase sales into the region on commercially favourable terms.  It is anticipated that this opportunity may continue in the medium term provided the UK remains ASF free.

In July the group acquired Katsouris Brothers for £41.3M.   The business is a processor and supplier of continental non-meat food products and the acquisition generated goodwill of £23M.  In the two months since acquisition the business has contributed a profit of £900K to the group.  The agreement includes contingent consideration payable over the next year and is valued at £6.8M. 

Going forward, commissioning of the new poultry facility is due to be completed by the year-end and the board looks to the future with confidence.

At the current share price the shares are trading on a PE ratio of 23 which falls to 22.1 on the full year forecast.  After a 5% increase in the interim dividend the shares are yielding 1.8% which increases to 1.9% on the full year forecast.  Net debt increased by £120M to £113.7M during the period. 

Overall then this was a decent period for the group.  Profits were up, as was the operating cash flow but no free cash was generated and the capex is not covered by the operating cash flow.  The pork business is doing well due to increased demand from China following the outbreak of ASF there, but this might be a temporary boost.  Elsewhere poultry did fairly well and some other markets were rather sluggish. This remains a good company but I feel the forward PE of 22.1 and yield of 1.9% is rather expensive.

On the 17h December the group announced that it has acquired Packington Pork from the Mercer family.  The business comprises pig farming and rearing operations and specialises in the production of British free range and outdoor bred pigs.  The transaction increases the group’s self-sufficiency in UK pigs processed to over 25%.

CWK

On the 17th January the group released a Q3 trading statement where they stated that pre-tax profit would be above current market forecasts.  There was revenue growth across all four of the product categories.  Export sales have been exceptionally strong and the outlook remains positive.  African Swine Fever has created opportunities for Far Eastern exports as long as the UK remains disease free. 

Net debt increased during the period reflecting the usual seasonal uplift in working capital, the ongoing capex programme and the acquisition of Packington Pork. 

On the 11th February the group announced that it had acquired the Buckle family’s pig farming and rearing operations as well as their 50% share of the White Rose Farms pig production joint venture set up with Cranswick in 2018.  The enlarged pig enterprise, specialises in the production of Red Tractor assured pigs in Yorkshire.  This transaction increases the group’s self-sufficiency in UK pigs processed to over 30%.


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