Finsbury Food has now released their interim results for the year ending 2018.
Revenues grew when compared to the first half of last year as a £371K decline in overseas revenue was more than offset by a £1.5M growth in UK revenue. Cost of sales grew more quickly, however to give a gross profit £723K below last time. Depreciation was up £331K but other admin costs declined by £1.4M so the underlying operating profit grew by £388K. There were £9.7M of restructuring costs, however, so the group saw a £9.2M swing to an operating loss. There was a £450K reduction in the value of hedging income but other finance costs saw modest falls so after tax charges decreased by £1.8M top give a loss for the year of £1.8M, a detrimental movement of £8M year on year.
When compared to the end point of last year, total assets increased by £3.7M, driven by a £1.7M growth in intangible assets, a £1.1M increase in deferred tax assets, a £1.1M growth in cash and an £814K increase in receivables, partially offset by a £1.4M decline in property, plant and equipment. Total liabilities also increased during the period, mainly due to a £6.6M increase in provisions and a £1.4M growth in payables. The end result was a net tangible asset level of £19.3M, a decline of £5.4M over the past six months.
Before movements in working capital, cash profits increased by £720K to £12.7M. There was a neutral working capital position compared to a cash outflow last time and after tax payments increased by £453K the net cash from operations was £10.6M, a growth of £4.2M year on year. The group spent £4.9M on property, plant and equipment, partly relating to the new cake line and business IT system, and £2.4M on the closure of operations to give a free cash flow of £3.3M. This covered the dividends of £2.6M and after a net drawdown of loans there was a cash flow of £1M and a cash level of £4.1M at the period-end.
The adjusted operating profit in the UK bakery was £7.3M, a decline of £52K year on year. The grocery ambient cake market saw a year on year volume decline of 2% but value growth of 1.3%, and the bread and morning goods grocery market saw a volume decline of 1.3% and value growth of 2.2%. The profit margin of the UK operation decreased to 5.2% due to commodity price pressures, particularly a spike in butter prices.
The adjusted operating profit in the overseas business was £1.2M, a growth of £234K when compared to the first half of last year. The business is heavily exposed to the Euro which has had a favourable impact on profits in the period. In Euro terms the business has performed well too, however.
A decision was made in August to close the Grain D’Or bakery based in London. The group had implemented a range of initiatives to improve the business but it continued to incur operating losses. It traded in a particularly competitive environment which created strong competition on contracts. Together with cost pressures being experienced across the industry the business lost two large contracts after the year-end. Formal consultations to close the bakery were concluded and closure was completed in December.
The group also closed its much smaller Campbells bakery in Scotland in October. A rationalisation programme had decreased the volumes considerably at the bakery and the overhead cost of running a small remote bakery was not sustainable. The turnover of these operations was £13M in the first half and there was £9.7M of costs relating to the reorganisation which resulted in a net cash outflow of £2.4M. The negotiations relating to the cost of exiting the Grain D’Or bakery, although last year an impairment of £4M was taken against its assets.
Going forward, the UK grocery market continues to be challenging with food inflation becoming entrenched. This is a result of increased commodity prices, the adverse impact of forex movements and the above inflation increase in the National Living Wage. The group is working hard to mitigate this input cost inflation through operational efficiency, investment in automation and price increases. The board expect the group’s steady performance to continue into the second half of the year.
Going forward, headwinds will persist into the next period but the board believe they will make steady progress in the period ahead.
At the current share price the shares are trading on an underlying PE of 13.7 which falls to 13.2 on the full year consensus forecast. At the period-end the group had a net debt position of £16.6M compared to £17.4M at the end of last year. After a 10% increase in the interim dividend the shares are yielding 2.4% which increases to 2.6% on the full year forecast.
Overall then this has been a fairly solid period for the group. Underlying profits did increase slightly, as did the operating cash flow, with an OK amount of free cash being generated, but net assets saw a decline due to the various impairments. The UK market is somewhat subdued and suffering from cost inflation, but the group broadly held their own, while the overseas market is benefiting from favourable forex movements. With a forward PE of 13.2 and yield of 2.6% these shares are not overly cheap given the current headwinds although I do believe that this company will do well when the market picks up.
On the 16th July the group released a trading update covering the year. Total group revenues grew by 2.4% on a like for like basis and the board are confident on delivering profits in line with market expectations. The core UK bakery division grew 2.8% on a like for like basis, ahead of the wider market, while the overseas division declined by 0.7%. The group has recovered the cost pressures from commodity and labour inflation through operational efficiency and price rises.
Looking ahead, the current UK economic environment remains challenging and is showing little sign of abating. Nonetheless the board believes the group will maintain its market leading production and continue to deliver growth over the period ahead.