logo-loader

Adding ingredients to the mix is working for Real Good Food

Last updated: 11:20 05 Apr 2017 BST, First published: 11:20 05 Apr 2016 BST

Icing
You can have your cake, and decorate it

There can be no denying Real Good Foods PLC (LON:RGD) did well to exit its wholesale sugar business Napier Brown in 2015

Sugar remains an important part of the business still, but in a much more diluted or downstream way than before.

Indeed, Real Good Food is the largest sugar paste producer in the world currently, believes Pieter Totté, executive chairman.

He adds that with the wholesale business of Napier Brown sold, the ‘treat and hobby’ markets are firmly the emphasis.

Sugar crafting is what Totté calls it and TV series such as ‘The Great British Bake-Off’ and other specialist cookery programmes have given it an almighty kick forward over the past two years.

Real Good sold Napier Brown in May 2015 for £44.4mln, generating a profit of £9.1mln, transforming the balance sheet as well as streamlining what it does.

By the end of March 2016, net debt was equivalent to around one year’s underlying earnings (EBITDA) at £5.1mln.

What the sale left was three arms: Food ingredients; cake decorating; and bakery, through the Haydens business.

What’s it about?

Under these three banners, Real Good owns a number of standalone businesses. Renshaw and Rainbow Dust Colours in cake decoration; Garrett and R&W Scott in food ingredients and the premium bakery arm (Haydens).

Since the Napier Brown disposal, the strategy has also been to add bolt-on acquisitions to the various parts of the business.

In December 2015, Garrett acquired the sports supplement business ISO2 Nutrition sports from administration for a nominal sum.

Garrett was already a customer of ISO2 Nutrition and just integrated its range of body-building supplements, whey protein and sports nutrition into its own ingredients portfolio.

In February 2016, and more substantial, was the acquisition of trade bakery Chantilly Patisserie for £1.75mln cash.

An earnings enhancing deal, Paignton-based Chantilly employs 40 and produces high-quality, hand-made frozen desserts.

Its customers include Marston's Brewery, Warner Leisure, Brakes and Country Range.

The business sits “extremely well” with Haydens, which makes cakes, pies, tarts and crumbles for the food service market, said Totté.

Chantilly operates at the top end of the trade market, he added, and supplies patisseries to four star hotels and higher and gastro-pubs.

The company is moving to larger premises as it expands and the quality is such that Real Good may consider the top end of the retail sector as well.

On sales of £2.2mln in the nine months ended December 2015, Chantilly generated operating profits of £400,000.

The group has already identified a number of cross-selling opportunities between Haydens and Chantilly, plus there are a number of opportunities for automating various manual processes within Chantilly.

“The acquisition of Chantilly Patisserie is a perfect example of the type of business we are keen to acquire and build on. It operates in a small but fast growing market niche - high quality out-of-home desserts. The business brings to us great skills in product and specific customer knowledge while we can help it grow and extend its technical capabilities and customer reach,” Totté said.

The latest acquisition, in April 2017, is a controlling stake in Welsh healthy snack bar maker Brighter Foods.

Brighter's snacks are targeted at areas such as diet control, gluten free, lactose free, low or no added sugar, sports nutrition, organic and fair trade.

Real Good Food will pay up to £9mln for the company, and its inclusion in the Real Good fold is expected to enhance earnings from the get-go.

Indeed, house broker whacked up its forecast of headline profit before tax for the current financial year by 71% to £6.4mln after the deal was announced.

The broker is predicting profit before tax for the financial year just ended of £2.5mln, so that gives some idea of the impact Brighter Foods is expected to have.

The broker thinks the acquisition represents “compelling value” at 3.4 times last year's underlying earnings (EBITDA) for the initial stake and 6.5 times EBITDA for the whole kit and caboodle.

 

What is it worth?

Sales in the ongoing businesses last year to the end of March 2016 were £100.4mln and underlying profits £5.0mln.

Those numbers were down slightly year-on-year but Totté had already flagged not to expect too much while the business settles down in its new form.

A sign of the group's confidence in the future came in the form of a maiden interim dividend, announced in the interim results.

The group said total group sales in the six months to the end of September rose 5% to £49.0mln from £46.7mln, primarily as a result of a strong performance by its Premium Bakery Division, which has been boosted by the inclusion of Chantilly Patisserie, the business it acquired in February.

The group’s results are traditionally weighted to the second half of the financial year, which includes the important Christmas trading period, and the first half saw a widening of the loss before tax to £949,000 from £216,000 the year before.

Earnings before interest, tax, depreciation and amortisation (EBITDA) were positive at £1.2mln, before one-off items, albeit lower than last year’s EBITDA of £2.0mln.

The reduction in EBITDA was attributed to increased investment costs across the group, plus volatile commodity price movements, which had a big impact on the Food Ingredients division. Those commodity price movements are hard to predict, and while the group is confident full year EBITDA will be up year-on-year, it did caution that there was a possibility it would fall short of market expectations.

The hint of a mild profit warning has hung over the group's share price performance this year, and the company's shares lost a quarter of their value, sliding to 25p.

FinnCap responded to the news of the Brighter acquisition by whacking up its price target from 47p to 75p, which is still only 11 times projected earnings for the year to the end of March 2018.

The market took heed, with the shares surging 22% to 30.5p after the finnCap research note.

Given the new focus, a market value of £22mln or so at the current price looks mean, especially on a sales/market value ratio, though it may take a couple of sets of numbers for the market really to appreciate the changes under-way at the group. 

FTSE rises ahead of Easter weekend, JD Sport gains on upbeat outlook -...

The FTSE 100 gained on the final morning of this shortened Easter trading week. Festive cheer was limited though, as Thames Water confirmed shareholders would not provide it with a £500 million rescue package, prompting speculation over the London supplier’s future. On a more positive...

5 minutes ago