Finsbury Foods operates in the cake and bread markets which is focused on premium, celebration and well-being. The UK bakery segment manufactures and sells bakery products to the UK’s multiple grocers both for supermarket own brands, the group’s brands and licensed products. The other segment is a 50% joint venture, although the group does have a controlling interest through prior agreement with Philippe Stretz, and it sells the group’s products into Europe. Finsbury Food has now released its final results for the year ending 2014.
Revenues fell when compared to last year as UK bakery sales were down £624K and Overseas revenue was down £263K. Cost of sales also fell, however, so that gross profits were £1.7M higher than in 2013. Overall admin expenses increased as the group increased marketing support, new product development and range support to make the operating profit £231K lower at £7.1M. We then see a decline in finance costs as bank interest fell by £472K and interest on interest rate swaps was down £217K. Tax increased year on year to give a profit from continuous operations of £4.9M, an increase of £150K on last year. When the profit from the discontinued operation, along with the profit on its sale is taken into account the total profit this year was some £2.9M below that of 2013, although adjusted profit, taking off discontinued operations and one-off income/costs was £6.5M, an increase of £1M when compared to 2013.
When compared to last year, total assets increased by £1.7M driven predominantly by a £2.9M increase in plant and equipment, partially offset by small falls in cash levels and prepayments. Conversely, liabilities fell when compared to the end point of 2013 due to a £1.6M fall in accruals and a £789K decline in the liability associated with the hedges. The fall was partially offset by a £1.1M increase in loans and a £787K increase in pension liabilities. The end result, once goodwill is discounted, is a net tangible asset level of £10.7M, an increase of £4M when compared to 2013. It is worth noting, however, that there is £13.2M worth of non-cancellable operating leases off the balance sheet which is higher than the value of net tangible assets.
Before movements in working capital, cash profits fell by £1.9M when compared to last year to just under ten million pounds. Adverse movements in working capital, particularly a decrease in payables, meant that cash generated from operations was £6.3M lower at £7.7M before reduced interest and tax meant that net cash from operations, at £4.9M, was less than half that of last year. Unfortunately this cash did not cover the £6.2M spent on the purchase of property, plant and equipment and the group had a negative free cash flow of £1.5M. Various repayments were counteracted by a £2M drawdown of the revolving credit facility and after dividends were paid, the cash outflow was £754K which left the company with cash levels of just £592K at the end of the year.
Some of the group’s businesses include Lightbody based in Scotland which is the UK’s largest provider of celebration cakes with Disney, Weight Watchers, Nestle and Thorntons among the licensed brands along with own brands and in store bakery bites. Memory Lane cakes based in Wales is the leading manufacturer of the UK retailer’s premium own brand cakes along with a number of licensed brands. Nicholas and Harris, based in England, produces a range of specialist breads to UK retailers with a focus on own label breads, rolls and buns. This year the bakery underwent a 60% expansion to its footprint to allow more efficient distribution and space for future growth. The main licensed cake products include Weight Watchers, Nestle, Thorntons and Disney.
Overall results were comfortably in line with expectations. I did find that the letter from the Chairman makes interesting reading. He has only recently been appointed and seems to be very enthusiastic. Over the next few years he is looking to improve shareholder value, act justly towards employees and grow the business. There does not seem to be a focus on customer service, though, which some might say should be the most important consideration. Although some organic growth is expected, the bulk of any future expansion is likely to come from acquisitions and it seems the desire is to double the size of the group in a fairly short period of time given the right opportunities, but hopefully they will not overdo it.
The group underwent two very different halves during the year with the first half maintaining the good momentum carried over from previous periods with profits enjoying a 50% uplift mostly due to a reduction in interest charges after the cash from the business sale was used to pay off some debt. The second half was more challenging as commodity price inflation began to show up again and other costs such labour increased. When this was combined with the squeeze from the customer side as the supermarket price war took hold, the group have had to search for efficiencies and have installed leading edge robotics at the cake factory in Scotland and extended space at Nicholas and Harris by 60%.
It is clear that consumer behaviour has changed as Aldi, Lidl and Pound Shops have seen a niche in the market and are enjoying huge gains which could be difficult for the group as most of their important customers are made up of the large traditional supermarkets. The business environment is unlikely to get any easier in the near term.
Underlying operating profit at the UK bakery business was £6.1M, £500K higher than last year. Despite this improvement, one area of disappointment was the speciality bread market which after enjoying strong gains in previous year, encountered flat sales this year whereas the cake business seems to be doing rather better. Underlying operating profit at the overseas business was £1.1M, £100K more than in 2013.
The underlying ambient cake market in the country saw value sales fall by 2.4% and unit sales declined by nearly 5%. The market in bread and morning goods remained flat during the year which is more of a niche area for the group. Conditions in the underlying bread market, however, have been just as difficult with sales declining by 3.4% in term of value.
During the year there were a number of one-off costs. Expenses of £643K related to redundancy and restructuring and £116K related to due diligence and consultancy expenses associated with an aborted acquisition. Last year costs of £471K related to costs associated with the cancellation of unapproved share options and the issue of ordinary shares in exchange for this cancellation.
There is quite a concentration in the group’s customers with five clients making up a whole 70% of sales with two accounting for £35M each. There is also some sensitivity to an increase in interest rates with a 1% increase in the base rate or LIBOR decreasing profits by £160K. Probably more of a risk, however, is commodity prices with the group being susceptible to appreciations in butter, sugar and chocolate in particular.
In February 2013 the group disposed of the Free Form business consisting of Livwell Ltd and United Bakeries to Genius Foods. They received £17.1M in cash after any disposal costs and £2.7M of deferred consideration which is payable in February 2015. They lost £18.9M in net assets with the disposal so the profit for the transaction was £1.2M. During the year Martin Lightbody relinquished the role of Chairman after years of service in which the group turned itself around. David Marshall and Crawford Currie also stepped down from the board. In their place, Peter Baker stepped in as Chairman having gained experience at RHM Consumer Brands, British Bakeries and Rank Hovis Mills.
At the current share price, the underlying P/E ratio stands at an undemanding 10.9 falling to 9 on next year’s forecast. At the end point of the year there was £8.8M of net debt, an increase of £1.6M when compared to last year but bank facilities are currently comfortable with £19.6M of headroom regarding the HSBC loan. At the current share price the dividend yield stands at a rather pedestrian 1.4% even after the 33% year on year increase but it increases to a more useful 3.6% on next year’s consensus estimates.
Overall then, this was a decent if rather uninspiring update. Underlying profits were up, as were net assets but if intangibles are discounted, the balance sheet does not look that strong. The group didn’t really generate that much cash either, with operational cash flows not covering capital expenditure. There is no doubt that the shares are cheap on a forecast earnings basis but the increased pressure on the group’s markets means I find it very difficult to see where any growth might come from so I am not going to purchase any shares at this time.
On the 10th October the group announced that it had entered into an agreement to acquire the Fletchers Group who produce morning goods and specialised bread products for UK grocery retailers and food service customers. The total cash consideration will be £56M which will be funded through a placing of new shares, raising £35M and new debt facilities with HSBC and Lloyds of £52M. Due to the size of the acquisition it will be treated as a reverse takeover and require shareholder approval. As well as providing new complimentary products, I see one of the main advantages of the acquisition as expanding the customer base into restaurants, coffee shops, bars and fast food outlets. After completion it is expected that the enlarged group will adopt a progressive dividend policy with an initial dividend cover of about 3.5 times on an EPS basis.
In addition, the group released a trading update that covers the period since the year end. Sales were up 5% ahead of the same period of last year through a combination of volume, mix and price. Fletcher’s performance since their year-end was in line with expectations and secured a number of significant contracts that will benefit sales in the second half. Last year, Fletchers reported revenues of £95M and EBITDA of £6M which nearly doubles the equivalent figures for Finsbury. Overall then, this looks like a good deal. The earnings from Fletchers will make a significant impact on the group and gives them exposure to the more healthy restaurant and coffee shop markets. It is also a good sign that the group managed to raise most of the cash through a share placing rather than raising debt levels too much. These shares have now become much more interesting in my opinion.
On the 26th November the group released an AGM statement covering the first four months of the year. Overall trading was in line with expectations. Total revenues grew by 3.9% to £57.3M as the UK Bakery division grew 5% with a particularly strong contribution from the cake business. The overseas division saw revenues decline by 3.1% as it reduced the level of promotional sales in order to optimise returns. The operating environment remains challenging as shoppers continue to focus on value and despite moderating slightly, input costs remained a factory. The efficiency benefits of the ongoing capital investment programme are also now being delivered successfully which will lead to an improvement in the operating margin later in the year and beyond.
On the 19th January the group released a statement covering the first half of the year. Since the last update the strong trading performance continued through the Christmas period. Total sales grew by 24% to £107.6M and was 5.6% up on an organic basis. After the Fletchers acquisition, the UK Bakery division grew by nearly 28% with an especially strong performance from Cake. The overseas division finished the first half strongly resulting in flat sales year on year, reversing the previously reported decline. The strong sales growth was aided by new products such as Disney Frozen cakes, popular Christmas seasonal ranges and increased promotional activity despite the continuing challenging market. Improvements in operating efficiencies resulting from the ongoing capital investment programme, and overhead reductions completed during the second half of the year complemented the stronger first half organic growth. These benefits helped offset labour and general cost inflation pressures which have moderated compared to recent years leading to improved operating margins. The Fletchers acquisition is now being integrated into the group and the board remain confident that the planned scale and efficiency benefits will be delivered as expected and that the group is in a strong position for the year ahead. This all seems very positive and I will look to enter a position here funds permitting.
Looking at the chart, the share price is above both the 50 day and 200 day moving average with the former also diverging from the latter. There also seems to be some big volume buys here and this chart is looking pretty good to me.