Berenberg more cautious on food manufacturers, downgrades Greencore and Bakkavor
Berenberg downgraded its recommendations on Greencore and Bakkavor on Friday as it turned more cautious on the near-term outlook for food manufacturers.
The bank, which cut Greencore to 'hold' from 'buy' and Bakkavor to 'sell' from 'hold', cited a consolidating customer base, which is currently negotiating aggressively, and an inflationary environment.
It said that while both companies operate in markets that have been outpacing the wider UK food market, with political and economic uncertainties continuing to weigh on consumer confidence, shoppers are at present reverting to more cautious spending patterns.
"Furthermore, raw material and labour cost inflation headwinds appear to have accelerated, putting pressure on margins," it said.
Berenberg reckoned Greencore is better placed than Bakkavor to offset these challenges and should also benefit from higher levels of free cash flow and return on capital, given the different stages of their respective investment cycles.
The bank cut its price target on Greencore to 210p from 230p. With low consumer confidence dampening volumes, Berenberg expects average organic revenue in the food-to-go category to slow to around 3-9% over the coming years.
"While this is clearly much lower than the high growth experienced historically, we still expect revenue to grow ahead of the wider UK food market as Greencore’s products continue to take space within chilled food isles."
It slashed its price target on Bakkavor to 105p from 200p as it argued that 2019 would be a difficult year.
"We believe its high levels of exposure to dairy inputs, which have been subject to unprecedented levels of inflation, together with rising wage inflation, will cause margins to go backwards in FY 2019. Against this backdrop, and with execution risk present within the international business, we downgrade."
At 1340 GMT, Greencore shares were down 3.4% to 200.70p and Bakkavor shares were 1.4% lower at 127p.