Specialist meat packer Hilton Food Group's strategy of operating with one customer per market could lead it to benefit from the horsemeat crisis, predicted City analyst Shore Capital.
Hilton Foods' business model of one customer per market could prove a virtue not a vulnerability, said Shore Capital
While its analysts Clive Black and Darren Shirley feared initially such dependency could be "more of a vulnerability than a virtue", that had changed,given the challenges faced by its customers – such as Tesco – and the fact the group "demonstrably adds value".
"Indeed, it remains the case that Hilton could yet be a beneficiary of volume gains from the horsemeat situation," they added.
In a management statement for the 28 weeks to July 14, Hilton Foods admitted its business had been affected "by well-publicised industry issues" – a coded reference to the horsemeat crisis – while economic conditions had remained challenging and consumer spending constrained.
Geographical diversity
The company reported performance had been in line with the board's expectations. It continued to benefit from its geographical diversity and new product lines and more favourable currency valuations.
Shore Capital noted the more settled trading conditions during the quarter compared with the same period last year, when it faced more challenging markets incorporating down-trading, rising raw material prices and negative foreign currency translation.
A year on, the news from the UK economy was showing signs of improvement, said Shirley and Black. But food volumes in the second quarter seem to have remained subdued for the major players, they noted.
"More encouragingly, perhaps, the dust is seemingly settling on the meat adulteration issue that seemed to particularly impact Tesco, as referenced in the retailer's first-quarter trading statement."
Black and Shirley noted that the shares of the firm – along with other small and mid-cap consumer staple companies – had appreciated significantly over the last year; increasing in value by nearly 40%.
"It is a company that we believe the market respects for its conservatism, straightforward approach, resilience and ultimately growth," they said. "Hilton has a strong balance sheet, which provides it with a firm backbone, unlike a number of more debt and pension encumbered peers."
Shore Capital retained its 'hold' advice on the firm's stock.
More bullish
Panmure Gordon remained more bullish, maintaining its 'buy' recommendation.
Its executive director Graham Jones described Hilton Food's update as a "reassuring message".
More broadly, Hilton reiterates its ongoing signals to the market that it continues to explore and examine opportunities to expand the group in its existing market network and new territories.
Jones predicted modest start-up losses at the Australian joint venture with Woolworths would hold earnings per share progress back, with the value flat at 12.8p.
But, with the development work at Bunbury, Western Australia on schedule, he predicted a second-half contribution from the business.
Panmure Gordon maintained its full-year forecast of 4.6% earnings per share growth to 26.1p.
Meanwhile, Hilton Foods' management repeated its plan to explore fresh business opportunities in its existing markets and new ones.
Hilton will post its half-year results on September 10.
