Numis upgrades Greencore to 'buy' after first quarter results

Numis has upgraded its recommendation on Greencore to ‘buy’ from ‘add’ with an unchanged target price of 285p, after the food producer reported “excellent” first quarter sales.

For the quarter ended 30 December 2016, revenue of £417m was up 17.1% on a reported basis. On a like-for-like basis, excluding revenue from The Sandwich Factory acquisition in July, sales rose 9.1%.

In the convenience foods division, revenue increased 16.4% to £401.6m on a reported basis and up 8.9% on a LFL basis.

In the UK, revenue rose 13.9% and up 9% on a LFL basis due to growth in the Food to Go business, which benefitted from new business wins.

The company is confident that it will deliver 2017 financial year results in line with expectations, notwithstanding the investments in the US and UK.

Numis said the results were “highly impressive” and the company has cleared up an number of investor concerns, including rising input costs and the performance of newly acquired US convenience food producer Peacock Foods. Peacock was bought for $748m in December.

“The key points in our view were thus. 1) The pointers to some future revenue synergies from Peacock Foods in the US (none were assumed when the deal was unveiled). 2) Management's confidence that higher input and labour costs can be coped with this fiscal year. These will be £20-25m for the UK operations in terms of raw materials & packaging and £13-15m for labour costs, with US labour costs likely to be higher in high single-digits in $ms. 3) the reiterated warning that UK investment and commissioning costs will feature and will lead to a second half-loading to progress for the 'old' Greencore this fiscal year. 4) The pointers to Peacock Foods' sales performance in the fourth quarter calendar year 2016 being in line and running in mid to high single-digits then: akin to the prior pointers to market growth for its key categories.”

Shares dipped 0.47% to 234.90p at 0959 GMT on Wednesday.