Analysts at Berenberg have upgraded their rating for Hilton Food Group PLC (LSE:HFG) to 'buy' from 'hold' as they believe the firm's recent profit warning provides investors with "a clear buying opportunity".
In a note to clients, the German bank's analysts said: "Hilton’s offering is highly valuable to grocers, offering them a way to meaningfully reduce cost, improve their supply chains and deepen their product offering."
"Headline slim margins and short-term issues should not distract from its ability to consistently deliver through the cycle, with high-volume turns enabling Hilton to generate exceptional returns on capital," they added.
Following a recent trip to Australasia to see some of the group’s assets, the Berenberg analysts said they are confident that Hilton can both deepen its relationship with existing customers, and roll out its offering in more geographies.
They noted: "Hilton has a strong track record of organic growth, entering new geographies with new retail customers looking to reduce cost, free up capital and improve their customer proposition. Hilton’s model is highly scalable and Hilton has proven its ability to serve a wider variety of markets following its entry into the relatively small New Zealand market.
"While entry into a new market takes time due to construction, we think Hilton has balance sheet capacity to enter another market the size of Australia, a move that has the potential to improve FY25E earnings by as much as c30-40%, in our view."
The Berenberg analysts pointed out that Hilton’s profit warning with its interim results on 15 September was largely due to cost inflation in its multi-customer businesses, an area in which it has increased exposure through acquisitions in recent years.
They said: "After reviewing the business model and debating with management, we expect profitability in these businesses to be restored over the next two years as Hilton increases prices and generates operational efficiencies, while commodities normalise. Importantly, we think these businesses improve Hilton’s overall offering, which will help drive organic growth in its core single-customer business."
"Although underlying volumes in its core business have been affected by a channel rebalancing and a softening consumer outlook, we think Hilton has a number of levers to offset this over the next few years," the analysts concluded.
The rating upgrade came as the Berenberg analysts reduced their price target for Hilton to 850p from 1,200p, which they said still implies around 40% upside from the current share price of 639p, up 2.6% on the previous session's close.