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Real Good Food PLC: THE INVESTMENT CASE

Real Good Food recovery plan derailed by rising butter costs

Harveen Rai has joined as the new finance director and company secretary. Pat Ridgwell, a non-executive director, is now interim chairman
picture of cake
INVESTMENT OVERVIEW: RGD The Big Picture
Baking is booming thanks to programmes such as Bake-Off

In the space of a few months, the mix has gone flat for cake, decoration and bakery products group Real Good Foods PLC (LON:RGD).

After raising £15mln in June for an expansion push, August saw the departure of executive chairman Pieter Totte, finance director David Newman and head of the audit committee Peter Salter following a profit warning and previously undisclosed consultancy payments.

READ: Real Good Food hurt by rising raw material costs

Harveen Rai has joined as the new finance director and company secretary. Pat Ridgwell, a non-executive director, is now interim chairman while Christopher Thomas has taken on an executive role.  

Rai has 20 years experience in consumer goods businesses and was previously chief financial officer at bakery giant Arzyta UK Holdings Ltd, where she was involved in implementing and streamlining the processes and controls of the company.

Company doctor Hugh Cawley has also joined the board as a non-executive. 

An accountant, he has worked on a number of businesses facing a major strategic challenge, with spells previously at S Daniels, Dawson Holdings, office2office and, most recently, Progility and Driver Group.

What it does?

Baking and cakes are what Real Good is about.

It 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).

READ: Real Good Food businesses 'fundamentally sound' says new management

The strategy recently has also been to add bolt-on acquisitions to the various parts of the business.

For example, in April, it acquired 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.

Profit expectations hit by third warning

June saw the start of a major investment into two of its plants to take advantage of rising demand for Yum Yums and its cake decoration ranges.

Some £15.5mln was raised through a combination of loans and equity to boost capacity at Renshaw’s Crown Street site in Liverpool and Haydens in Devizes.

Renshaw’s was earmarked for £7mln to boost capacity of its icings lines by 50% while Haydens will get £8mln to add additional freezing capacity and a new automated Yum Yum glazed pastry line.

Butter hike hurts

In October, the company said good sales growth had not translated into better profits making the third warning this year.

As a result, underlying profits [EBITDA] for the year to March will be well below the £6.5mln estimated previously and overall there will be a loss for the year.

Revenues over the first half of the current year were 13% higher on a like-for-like basis and by 20% including the Brighter Foods acquisition.

Higher raw material prices, butter mainly, due to problems with supply and exchange rate movements offset this sales pick-up, while upgrades at two key facilities, Haydens and Renshaws, have caused further disruption, the company said in a trading statement.

Premium Bakery, including Haydens, has been especially affected while the group overall has incurred significant consultancy costs after the boardroom upheaval earlier this year.

READ: Real Good Food receives £4mln to cover Christmas build-up

Another round of cost cuts is being instigated while the head office is being switched from London to Liverpool.

Cheap on sales but margins a concern

"Today’s profit warning is a big blow, especially as it comes barely a month after the company stated that its planned capacity additions were very much on track,"  said Russ Mould, at AJ Bell.

“Those investors who are already stuck with the stock – or are wondering if there is some contrarian value to be had – will note that the company’s market capitalisation is barely £17mln and it generates over £100mln in sales.

“Although the firm’s debts must be taken into account as well, this suggests those sales may be going cheap providing Real Good Food can turn them into decent earnings.

The nagging doubt is that the current squeeze on profits from rising commodity prices, especially butter, does raise the question of whether Real Good Food is strong enough to push through price increases of its own to compensate.

Shareholders offer support

The group's major shareholders again promised to support the business even if the current trading issues put the AIM-listed group in danger of breaching its bank covenants.

NB Ingredients , Omnicane International Investors, and certain funds managed by Downing had said previously they would provide additional funds, if needed, for working capital.

Shares were 23p.

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October 23 2017
Harveen Rai has joined as the new finance director and company secretary. Pat Ridgwell, a non-executive director, is now interim chairman

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