Finsbury Food has now released its final results for the year ended 2016.
Revenues increased when compared to last year with a £57.2M growth in UK bakery revenue and a £6.3M increase in overseas revenue (a £12.8M increase in organic revenue in total). Cost of sales also increased to give a gross profit £23.7M above that of last year. Depreciation was up £1.7M, share option charges increased by £749K and R&D costs grew by £550K with other admin expenses increasing by £15.9M. We also see a £4.3M impairment of goodwill against a £3.2M acquisition expense last year which means the operating profit grew by £3.3M. Finance costs/expenses tended to be similar to last year but tax charges grew by £1.4M to give a profit for the year of £7.8M, an increase of £1.6M year on year.
When compared to the end point of last year, total assets increased by £7.1M driven by a £3M growth in cash, a £2.6M increase in assets under construction, a £2.1M growth in trade receivables, a £1.8M increase in plant and equipment and a £1.3M growth in inventories, partially offset by a £2.5M decline in goodwill. Total liabilities also increased during the year due to a £2.6M growth in the pension liability, a £1.5M increase in borrowings, a £1.4M growth in deferred tax liabilities, a £1.3M increase in accruals and deferred income and a £1.2M growth in the current tax liability. The end result was a net tangible asset level of £24.1M, a growth of £1.5M year on year.
Before movements in working capital, cash profits increased by £9.7M to £24.7M. There was a cash outflow from working capital along with a £257K growth in interest payments and a £439K increase in tax charges to give a net cash from operations of £20.3M, a growth of £5.1M year on year. The group spent £12.1M on capex to give a free cash flow of £8.1M. This was enough to cover the £2.8M spent on shares for the employee scheme and the £3.3M paid out in dividends and after a net £3.3M in new loans, the cash flow for the year was £3.1M and the cash level at the year-end was £3M.
The impact of the extra week this year is to increase pre-tax profits by £358K but the organic growth of 5% was well spread, exceeding that of the market and initial expectations. The underlying profit in the UK bakery division was £15.9M, a growth of £5M year on year. Over 21% of the UK bakery sales are now into the faster growing out of home foodservice channel, compared to 0% two years ago. The underlying profit in the overseas segment was £1.5M, an increase of £357K when compared to last year as a result of improved distribution of licensed celebration cake and free from bakery ranges.
In the past year in the total UK ambient cake market, there has been a market value and unit sales fall of 0.4% and 1.5% respectively. Ambient cake is marginally outperforming ISB cake over this period and the group continue to perform well in their core markets of celebration cake, whole cake and cake bites.
Annual retail bread and morning good market sales are in decline, driven by the fall in sales of packaged sliced bread. Finsbury are a niche plyer in this market, instead they are focused on the growing sectors such as artisan bread, hot cross buns and rolls along with doughnuts, muffins and morning pastries. The foodservice bread and morning goods market continues to grow. Growth is coming from a number of categories, in particular added value burger buns such as brioche buns.
Successful licenses this year have included Minions, Star Wars and Batman which have been linked to big movie releases, and the more evergreen licenses of Me to You, Peppa Pig and Paw Patrol.
The group made a record capex investment of £12M during the year which facilitated a new artisan bread bakery, increased hot cross bun capacity and further cake automation. The growth strategy going forward will continue to be delivered by a combination of organic growth and targeted acquisitions. In areas such as celebration cakes and organic bread as well as diversifying into new channels such as foodservice cake will deliver organic growth and further acquisitions will introduce new product, customer or channel diversification or accelerate market consolidation in the core product areas.
The group is upgrading its IT systems with the objective of having a common ERP across UK Bakery. The system is the latest version of the existing system within the Fletchers business acquired in 2014. Recognising the inherent risks to a systems upgrade, an appropriate corporate governance structure has been put in place but the fact that the new system is the latest version of the existing system in operation within Fletcher’s business is a significant risk reduction factor.
During the year an impairment of the goodwill arising from the acquisition of Anthony Alan Foods in 2007 was made. This reflects the challenging market and changing dynamics of the healthier grocery market. The related goodwill has been fully impaired.
During the year the group announced the addition of two non-executive directors, Marnie Millard and Zoe Morgan, along with the forthcoming retirements of Paul Monk and Edward Beale who have both been on the board for over fourteen years.
Along with other food businesses the group will face inflationary pressures through both commodities cost increases, further driven by currency weakness after the Brexit vote, and the national living wage. If maintained, the devaluation of Sterling will lead to a new era of cost inflation for many raw materials and the planned future national living wage increases will increase costs and put pressure on margins. The group are working hard to offset this cost inflation through enhanced efficiencies but inevitably these pressures are inflationary.
At the current share price the underlying PE ratio is 12.8 which falls to 12.2 on next year’s consensus forecast. At the end of the year the net debt stood at £19.7M compared to £21.2M at the end of last year. After a 12% increase in the total dividend, the shares are yielding 2.3% which increases to 2.4% on next year’s forecast.
Overall then this has been a good year for the group. Profits increased despite the goodwill impairment, net tangible assets grew and operating cash flow was up with a decent level of free cash being generated. Both the UK and overseas business are growing despite some market problems but there are some potential banana skins on the horizon. The new IT upgrade has the potential to cause some disruption; the decline in the value of sterling is increasing raw material costs and the new living wage is increasing staff costs. Nonetheless, with a forward PE of 12.2 and yield of 2.4% this looks fairly priced in and these shares are probably priced about right – I continue to hold.
On the 28th September, deputy Chairman Paul Monk sold 146,000 shares at a value of £181K. After this sale he now holds 145,547 shares in the company.
On the 23rd November the group released a trading update covering the first four months of the year. Following the strong growth in recent years, trading so far this year has been flat and in line with expectations. Total group revenues were £101.5M during the period with the UK bakery division declining by 4% and the 50%-owned European business showing a 36.5% growth.
Input costs have increased substantially following sterling’s weakness but the group has been able to respond to these challenges by modifying promotional activity whilst also reviewing potential opportunities for reformulation changes to minimise the costs and maintain the affordability of their products.
This doesn’t sound all that positive to me and with the potential headwind of the living wage too, I am tempted to get out of this share.
On the 19th January the group released an update covering H1. Since the last update, trading has continued to be solid throughout the Christmas period and performance is in line with management expectations. Total group revenues were £156.6M during the half, delivering a flat year on year performance. The UK bakery division declined by 2.9% against a backdrop of UK food retail market deflation whilst the overseas division grew by 31.7%.
The group continues to benefit from strong cashflow and invested £5M in capital projects in the first half to build on its product innovation and continue to improve efficiency and productivity throughout the group. The board has identified continued investment as an aid to address the current challenges of sterling induced commodity inflation and planned national living wage increases. The scale of the current cost inflation is such that despite internal initiatives, further cost recovery will be required and will become inflationary in the second half of the year.
Overall, the decline in the UK is a concern, and this, combined with increased costs mean that I don’t think the time is right to invest here.