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Real Good Food ready to provide icing on the cake

The sale of Napier Brown has made the company a healthier proposition, but valued at less than nine times projected fiscal 2018 earnings, the market has yet to yield to temptation
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 last year.

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, 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 bodybuilding supplements, whey protein and sports nutrition into its own ingredients portfolio.

In February, 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 gastropubs.

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, Chantilly generated operating profits of £400,000. The final three months of the financial year for Chantilly were in line with expectations in terms of sales and margins. 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.

What is it worth?

Sales in the ongoing businesses last year to the end of March 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.

With the balance sheet strengthened, the company has seen spending rise on people, product and brands across all its businesses, but Totté added that he expects the margin impact to be short-term and it is well positioned for future growth following this investment.

Given the new focus, a market value of £22.5mln at 31p a share 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 underway at the group.

What the broker says

House broker finnCap said the results for the year to the end of March 2016 were in line with expectations, and it stuck with its forecasts for the next two years, and its 55p price target.

The broker sees sales rising to £112.9mln next year and £120.3mln the year after that, while adjusted EBITDA is seen rising to £6.2mln in 2016/7 and £6.9mln in 207/8.

Based on finnCap’s estimates, the shares are trading on less than eight times projected earnings for the year to 31 March 2018.

“We believe a rerating is warranted given the business has been streamlined operationally and financially, margins have upside risk and dividend payments will commence in FY 2017, although we accept that investor confidence may take time to establish,” the broker said.

On the subject of dividends, the company won approval from shareholders to cancel its share premium reserves and transfer the amount into distributable reserves, and the courts approved the transfer earlier this year, so a divi could be on the way in the current financial year.

The forecast from the house broker is that this will be 1.2p, and if finnCap is right, that would leave the shares yielding a savings account-busting rate of 3.9%. 



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Real Good Food PLC Timeline

December 06 2016
August 01 2016
April 26 2016

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August 01 2016
The sale of Napier Brown has made the company a healthier proposition, but valued at less than nine times projected fiscal 2018 earnings, the market has yet to yield to temptation

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