Shares in Cranswick (CWK) are 4.2% lower at £10.98 in early dealings, as the fresh pork producer pushes warns margin pressure is crimping profits. Analysts downgrade their numbers on news elevated pig prices will lead to flat operating profits for both the first half and full year.


In a trading update for the half to 30 September, the £555.3 million cap says pig prices hit a new record high in July and 'remained at this level throughout the second quarter.' Despite enjoying strong volumes and benefiting from ongoing efficiency gains, Hull-headquartered Cranswick concedes it will take time to recover these higher raw material costs from supermarket customers.


Combined with higher-than-expected start-up costs pertaining to its new gourmet pastry factory at Malton in North Yorkshire, first half operating profits will be flat year-on-year. Cautious Cranswick also warns that with UK pig prices 'likely to remain at historical highs at least through to the end of the calendar year', full-year operating profits are set to disappoint.


While today's news is a setback, there is much to cheer in the update from the cooked meats-to-sandwiches maker, which as Shares has consistently highlighted, has proven its ability to raise prices in the face of pressure from grocery retailers and cautious consumers.

Web chart - Cranswick - October 2013

Encouragingly, despite subdued UK grocery market conditions, the half saw strong sales growth driven by robust demand for British pig meat. Underlying sales rose 13% as the fresh pork and bacon product categories grew strongly, supported by the low price of pork compared to other proteins such as beef and lamb and the company's success with new contract wins. Factoring in contributions from acquired businesses Kingston Foods and Wayland Farms, total sales skipped 15% higher.


Ahead of next month's interim results (25 Nov), the cash-generative food producer also flags the acquisition of a further two breeding operations, adding an extra 3,000 sows and enlarging its herd to 15,000 animals. This investment gives Cranswick, which acquired key supplier East Anglian Pigs (EAP) for £10.7 million earlier this year (29 Apr), even greater control over its supply chain. This is important at a time when the UK consumer favours premium British ingredients and is increasingly focused on food provenance in light of the horsemeat scandal.


Following today's update, Investec Securities' Nicola Mallard sticks with her 'buy' rating and £12.30 price target for Cranswick. However, the analyst downgrades her March 2014 taxable profits estimate by 7% to £49.4 million and her earnings per share forecast from 84.1p to 78.6p. For the year to March 2015, the analyst sticks with profit and earnings estimates of £54.9 million and 87.9p respectively.


Panmure Gordon cuts its price target from £12 to £11.40 and reduces its current year operating profit forecast by 6% to £50 million, 'resulting in a 7.5% decline in both adjusted PBT and adjusted EPS to £49 million and 77.2p respectively.' Yet the broker writes that 'given the company's track record in recovering inflation and the further operational efficiencies likely due to the strong top line growth we maintain our forecasts for adjusted PBT of £54.5 million in FY 2015E.'

Issue Date: 07 Oct 2013