Real Good Food’s (LON:RGD) disposal of Napier Brown has left it smaller but removed a margin and working capital drag as well as exposure to the volatile EU sugar market.
That’s the view of broker finnCap, which has started coverage of the sugar products specialist with a ‘buy’ recommendation and 55p target price.
A 40% valuation discount to its peer group is too much and a re-rating warranted, it adds.
“While Real Good Food is smaller and lacks the liquidity of its peers, its forecast earnings trajectory over the next two years is far superior,” said the broker.
Operating margins are set to rise to 7% in 2017 from 1% in 2015 as investment in product, brands, senior personnel, marketing and infrastructure attracts higher-margin branded business, and increasing automation mitigates labour cost pressures.
The balance sheet has also been transformed by the Napier Brown sale and internal cashflow set to rise, adds the broker. More bolt-on acquisition are also likely.
“A fragmented industry throws up multiple opportunities to acquire high-margin, added-value bolt-on acquisitions akin to Rainbow Dust and Chantilly Patisserie.”
Investor confidence may initially need to be rebuilt post the recent profit warning, but "the business has been streamlined operationally and financially, margins have upside risk and dividend payments [1.2p is the estimate] will commence in 2017".
Shares edged higher to 43.6p.