Bakkavor LON:BAKK, the FTSE250-listed food producer, one of the stocks we tipped on our Consumer Staples watchlist back in December 2023 has just published its full-year results to end-December 2023.
Since The Armchair Trader last wrote about the fresh food company, the stock has appreciated 20.75% opening 5th March at 96.6p and rising to just shy of GBP1 after the release of its results. Over one-year Bakkavor has fallen 8.8% but over the last 52-weeks did reach the highs of 120p, from lows of 80p, and performance for the year-to-date has suggested that it can go on a similar run during 2024.
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The results – although not spectacular – showed progress and promise. Like-for-like revenue was up year-on-year 5.3%, something that was helped by inflation pushing the prices that Bakkavor could charge up. Most encouraging was the firm’s adjusted operating profit rising 5.5% y-o-y to GBP94.3m, which beat market expectations.
Pruning debt with free cash flow
Inflation across the globe saw central banks raise interest rates across the board. Quite prudently, Bakkavor used the year to prune its debt, which it trimmed by GBP55.3m with leverage falling 0.4x, the lower end of the target range of 1.5x.
The company was able to cut debt as it was pumping out cash at the other end, with free cash flow of GBP103.2m, a GBP49.8m improvement y-o-y. With all this spare cash Bakkavor paid back its bankers and rewarded shareholder patience by increasing total dividend paid by 5% to 7.28p/share, a welcome improvement on the 6.93p/share paid last year.
As we previously reported, the mid-cap food company started life in Iceland as a cod-roe processing company set up by two brother and then expanded into fresh food production. The company produces a range of meals, salads, desserts, dips, sauces, sandwiches and pizza and bread products, with over 3,200 product lines to over 900 suppliers in the UK, USA and China.
China set to have a greater role in Bakkavor’s story
A big part of the success story has been a return of the Chinese consumer, who although might not be yet back to buying high-end luxury products, automobiles or consumer goods, but have a strong appetite, and with a target market of 1.5 billion bellies to fill, China will have a greater role in Bakkavor’s story in the coming years.
At the moment the bulk of Bakkavor’s revenue is still in the UK, with reported revenues of GBP1.9bn attributable to the Brits from a total group revenue of around GBP2.2bn. However, there is only so much houmous that 65 million people can eat, and like-for-like growth in the UK was 5.4%.
In China, although reported revenues were only GBP12.7m, they grew 20.7% year-on-year, and when considering like-for-like sales, grew 32%. One slightly annoying fly in Bakkavor’s soup was its US performance. The company picked up 229.4m in revenue in the States, but this was 10.1% less than in 2022, and on a like-for-like basis down 8.4%. Food is faddy, and perhaps healthy eating isn’t in in the US currently. Nevertheless, the US wasn’t all bad, as Bakkovor’s strategy was to make its dips worth their salt, shifting focus from revenue growth to profit, with a return to profitability in 2H22 after a break-even 1H22.
Mike Edwards, who has just completed his first year as Bakkavor’s chief executive officer after Ágúst Guðmundsson stepped down as CEO in 2022 said in a statement: “As we enter 2024, momentum is building in all three regions [UK, US, China], which gives us confidence to deliver further financial improvements in the year ahead. This is clearly important as unprecedented levels of inflation have impacted profit margins over the last two years.”
The company spent 2023 mainly focussed on the reorganisation of its management teams and regional structures, installing, it said, the right people in the right places to implement the right systems.
Differing strategies for its three key markets
Following slightly different strategies in its key three markets, Bakkavor is looking to build market share in the UK, and keep laser-sighted on profitability, deciding to close two factories in the last year. In the US it has been a story of stabilisation, finding new margins and making the operations as efficient as possible. In China it was a volume story, having the facilities to deliver product as the demand came back. Its Asian business is now cash-generative and self-sustaining.
Edwards added: “The consumer environment is improving but still remains challenging, as such, we are planning for subdued volumes leading to revenue growth of 1% to 2% in 2024. We are not, however, reliant on volumes to deliver an improvement this year and trading in 2024 has started well. We are confident that the actions we have taken and the clear focus we have put in place through 2023 will continue to support positive momentum across the business. As a result, we now expect to deliver 2024 adjusted operating profit at least in line with the upper end of market expectations [based on company compiled consensus which includes all covering analysts. Adjusted operating profit consensus for FY24 at GBP97.1m with a range of GBP95.0m to GBP99.9m.]”
The company has a market cap of GBP556.25m.
