Real Good Food PLC (LON:RGD) has warned that turning the business around will take longer than expected.
Good sales growth recently has not translated into better profits, said the cake decoration and bakery group in a trading statement on Monday.
READ: Real Good Food businesses 'fundamentally sound' says new management
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.
The group's major shareholders have again promised to support the business even if the current trading issues put the AIM-listed group in danger of breaching its bank covenants.
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 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.
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.
A further update will be issued once the crucial Christmas trading period is complete.
All of its three divisions have good market positions and a clear plan of action is being worked on to take advantage of this, said the statement.
Third warning
"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.
“Real Good Food cited a long menu of woes when it came to explaining the warning, including currency movements, increased costs (notably butter), increased fees from corporate advisers as the company seeks to sort out its corporate governance woes (notably substantial consultancy fees paid to the previous management team), the disruption to output caused by capacity increases at its Haydens (cake decorations) and Renshaw (bakery) operations and also excessive overhead costs relating to its London headquarters."
“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.
Margins thin
“The company made £8mln at the operating level in 2013 but on sales of £265mln for a 3% margin – and matters have only got worse since then.
“This raises a big nagging doubt about the firm’s competitive position. 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.”
Shares fell 12% to 23p.
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