Pizzas, salads and hummus supplier Bakkavor (BAKK) is on the back foot again on Friday.

Its negative share price momentum is continuing – the shares are off another 4.8% to 122.6p - as investors digest a bearish assessment on the fresh prepared food leader from Berenberg.

In a note headed ‘Not as tasty as they look’, the investment bank downgrades Bakkavor from a ‘hold’ to a ‘sell’ and pares its price target from 200p to just 105p. Berenberg also puts the boot into Bakkavor’s UK-listed peer Greencore (GNC), a downgrade from a ‘buy’ to a ‘hold’ sending shares in the latter down 3.9% to 199.6p.

READ MORE ABOUT BAKKAVOR HERE

As Shares explained in-depth in September’s Under the Bonnet, Bakkavor joined the stock market at 180p in late 2017 and in the interim its shares have sunk on concerns over tough market conditions, input cost volatility and the post-Brexit supply chain.

In last month’s full year results statement, Bakkavor said ‘subdued consumer confidence and inflationary pressures have continued into 2019’, then added it expected ‘limited growth in the UK and a corresponding decline in the group’s EBITDA margin in the first half of the year’.

BAKKAVOR – THE BULL CASE

Founded in Iceland in 1986 as a fish products maker and exporter, Bakkavor is the leading provider in the large, fast-growing UK fresh prepared food market, one being driven by structural trends towards convenience, and is focused on building long-term sustainable growth in the US and China too.

Competitive strengths include strong capabilities in salads, ready meals, pizza and desserts, while Bakkavor also caters to the more affluent dinner party set through products such as hummus, dips and artisan breads. Sustainable competitive advantage stems from Bakkavor’s sheer scale and close partnerships with customers including Tesco (TSCO), Marks & Spencer (MKS), Sainsbury’s (SBRY) and Waitrose among others.

BERENBERG’S BEAR THESIS

Greencore and Bakkavor are benefiting from the shift towards convenience and the increase in private label products on supermarket shelves and operate in markets that have been outpacing the wider UK food market, yet Berenberg is nervous about the outlook for this pair of convenience food plays.

‘With political and economic uncertainties continuing to weigh on consumer confidence, shoppers are at present reverting to more cautious spending patterns,’ says Berenberg.

‘Furthermore, raw material and labour cost inflation headwinds appear to have accelerated, putting pressure on margins. We believe Greencore is better placed than Bakkavor to offset these challenges and should also benefit from higher levels of free cash flow and return on capital, given the different stages of their respective investment cycles.

'However, a consolidating customer base, which is currently negotiating aggressively, and an inflationary environment make us cautious about the near-term outlook for the food manufacturers.’

FEELING THE SQUEEZE

Berenberg stresses that customers are being ‘particularly aggressive just now’, since subdued consumer confidence is making it difficult for the food retailers to hike prices.

‘As a result, they are currently putting greater pressure on suppliers during contract negotiations,’ says Berenberg. ‘Tesco has been highlighted as being particularly aggressive, asking manufacturers to invest in the relationship now in order to secure their long term partnership, with its Booker food service business being used as a carrot of potentially increased volumes going forward.

'In addition, with Marks & Spencer making considerable price investment, we think it may look for manufacturers to bear some of the burden. If Greencore or Bakkavor are forced to forgo margin in order to secure these long term contracts, we believe this could be a material headwind to profitability in 2019.’

While 2019 looks like it will be a challenging year for UK food manufacturers, Berenberg does have a ‘buy’ rating on Cranswick (CWK), which it prefers due to its ‘significant expansion opportunity in the poultry sector’ and where ‘near-term expectations have already been rebased'.


Issue Date: 15 Mar 2019