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Cranswick: capitalising on the current trend of increased demand for British pork

Last updated: 08:45 28 Nov 2009 GMT, First published: 09:45 28 Nov 2009 GMT

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Growing revenue, net income and dividend, coupled with moderate gearing and market specialisation, would present a solid text book investment-grade business. London-listed Cranswick PLC (CWK) ticks these boxes; the company’s investors are content and speak very positively about the management’s focus on practically all Internet forums. The share price trajectory is another proof of investor sentiment; up almost 37% on its lowest point in the last 52 weeks.  

The £345m-Cap Hull-based company is focused on the supply of fresh and processed food to the UK food retail, food manufacturing and food service sectors. Formed in the 1970s by East Yorkshire farmers, the company is now a FTSE 250 member.

Supplying to its customers a range of top quality fresh pork, gourmet sausages, premium cooked meats, traditional air-dried bacon, charcuterie and sandwiches, Cranswick has been recognised on multiple occasions for quality of its products by independent bodies; the latest awards include: “2009 Meat Manufacturer of the Year” and “2009 Winner of Delicatessen Grocer Own Label Awards”. Production is carried out at a number of own facilities in the UK, with a team of chefs and scientists continuously working on new products in the company’s research unit.

Cranswick’s capital base is made up of £175.5m worth of equity and £65.5m worth of debt (almost £11m of this is current). Gearing (debt to capital) is thus a comfortable 27.2%. Interest cover has been improved dramatically and is currently running at 21 times, giving the company a synthetic rating of AAA. In December of 2008 the management agreed banking facilities equalling some £120m for three years; as of 31.3.09 the company had access to unutilised debt facilities of £48.6m. The weighted average cost of company’s capital is a tad shy of 7%.   

Six months revenue to 30.9.09 came in at £355.6m, up 19% on previous comparable period (7% of the increase was attributable to the newly acquired Bowes of Norfolk). Revenue expanded due to increase in business from existing customers, as well as a tangible gain in new accounts.

Sausage sales were up on previous period (management is expanding sausage facility to provide for increased capacity). Charcuterie products have also performed well, although assisted by competitive pricing. Air dried bacon category has also held up well, assisted by introduction of new products, such as sweet cured bacon. Cooked meats were so successful that this category required additional capital expenditure to cope with increased volume. Sandwich business has shown signs of revival following the difficult previous trading period, both retailers and airline clients have increased orders.

Income before tax in six months to 30.9.09 reached £21.3m, a 22% increase on previous comparable period. EPS from continuing operations in the same period increased by 20%, and came in at 33 pence. Return on capital was therefore 17.4%, well above the cost.

Total assets added up to £353.3m at 30.9.09, a marginal increase compared to previous period (£328.7m). Main contributors were increased goodwill and receivables. Cash and equivalents stood at £2.6m (£3.8m in previous comparable period). Total liabilities at 30.9.09 were fairly flat on previous period, at £177.8m. Liquidity was positive, at current ratio of 1.16.

Cash-flow from operations before taxation came in at £18.9m in six months to 30.9.09 (£21.4m in previous comparable period). Cap-Ex in six months to 30.9.09 (excluding acquisitions) amounted to £7.6m (£6.2m in previous comparable period). The management upped interim dividend by 14 per cent, to 8.0 pence per share; this is to be paid out on 22 January 2010.

Going forward, it is clear Cranswick will be capitalising on the current trend of increased demand for British pork. This trend has been in large part created by numerous celebrity chefs, including Jamie Oliver. The company’s upgraded primary pork processing plant in Hull, which is due for completion early in 2010, will be the largest such site in the UK.

It is also of comfort to note that the company has been able to demonstrate it can increase prices to combat input price inflation.

Clearer focus is also commendable; with two transactions now compete (pet division sold to management for £18.1m and Bowes of Norfolk pork processing business bought for £11.2m) the business is currently fully concentrated on the food sector. The integration of Bowes is proceeding well, according to management.

The sandwich business, however, seems to be the weakest link within Cranswick; although the business stayed profitable in the last trading period, cost inflation and sterling weakness are causing tightness. Pension deficit, although comparatively small, is another issue to monitor going forward (current deficit runs at £7.5m as at 30.9.09).

Panmure Gordon has a price target of 770 pence on Cranswick’s share. One does not need to think hard to see the logic. Current dividends, assuming annual growth of 5%, discounted at the cost of capital (see above) give the result that is a tad above Panmure’s number.

The verdict must be that the company displays a comparatively low operational risk and is well managed.

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