The Hilton Food Group's half-year results posted today (September 10) received a mixed reception from City analysts.
Hilton Food's Australian joint venture with Woolworths would become 'a major profit centre', predicted Panmure Gordon
Panmure Gordon repeated its 'buy' advice on the firm's shares, while Shore Capital recommended a more cautious 'hold' stance.
Graham Jones of Panmure Gordon noted earnings per share growth of 1.6% to 13.0p, with earnings growth restrained by £0.5M of start-up costs from the joint venture with Woolworths in Western Australia.
"We expect Australia to become a major profit centre and is an important validation of the global appeal of Hilton's business model," said Jones.
While the joint venture plan will lead to £1M of additional start-up costs in the second half of 2013 and next year, Panmure Gordon raised its 12-month price target from 450p to 480p.
Hilton Food posted strong turnover growth for the 28 weeks to July 14 – up by 9.4% to £593.8M.
Jones estimated currency added about 3.4% to sales, meaning growth was about 6%, driven by 0.7% volume growth and 4% pricing.
Operating profit was 1.2% higher at £13.4M, while profit before tax climbed by 3.3% to £13M. Without the start-up costs, it would have risen by 8%.
Weakness in consumer spending
Meanwhile, muted volume growth in the second half was due to continuing weakness in consumer spending – with costs above household income growth in many countries – plus the impact of higher meat prices across Europe and short-term industry problems in the UK and Ireland, he added.
In western Europe, sales rose by 10.2% to £543.5M with particularly strong volume growth seen in Holland, driven by new product lines.
In central Europe, sales edged up by 1% to £50.3M, with competitive markets and volumes falling modestly.
For its Australian business, Hilton posted joint venture income of £0.1M. Investment in the Bunbury plant was said to be progressing well, and increased retail packed volumes planned for late this year or early 2014. The Victoria plant was expected to start production in 2015.
"Hilton continues to trade well in challenging trading conditions, and while the two joint venture announcements in Australia do not benefit income in 2013 and 2014, we expect Australia to become an important profit centre for the group," said Jones.
Key peers Cranswick and Devro
Judging on the ratio of earnings value to earnings before interest, tax, depreciation and amortisation, Hilton continued to trade at a discount to its two key peers Cranswick and Devro, said Jones.
But Shore Capital analysts Darren Shirley and Clive Black said: "We see little in today's update to take the stock on from current levels, and note our concerns on the direction of margins, though we retain our 'hold' stance."
While profits were in line with expectations, reported sales growth was ahead of forecast by 9.4% year-on-year, implying further erosion in the group operating margin in the period, they added.
Hilton Food attributed the margin erosion to the impact of higher meat prices within fixed-rate packing contracts and cash margins being maintained. But Shirley and Black said the fall was a "modest source of concern".
Nicola Mallard, analyst with Investec said the the group's balance sheet remained in good shape.
"With little expansionary capex [capital expenditure] underway at present, the net debt fell from over 5M at year end to just under 2M and we expect the group to move to a net cash position by the full year," said Mallard.
