A Recession-proof Investment – Sausage Maker Cranswick plc
This article presents an investment case for Cranswick plc, which processes and supplies fresh pork, sausage, bacon, cooked meats, charcuterie and sandwiches.
Cranswick operates in the sausage industry which traditionally does well in a recession. During recessions people normally become more cost conscious. Rational shoppers will compare the price per pound or kilogram for meat in their supermarkets and quickly come to the conclusion that sausages offer better value for money than either pure chicken or beef. Besides sausages are easy to prepare, have been part of the American and European cuisine for centuries and are loved by kids.
COMPANY MANAGEMENT AND TRACK RECORD
Cranswick was incorporated in 1974. It started as a regional pork and pig-feed producer, but has been transformed into a manufacturer and supplier of food products to grocery retailers in the United Kingdom and the food service sector. The Company supplies fresh pork, gourmet sausages, charcuterie, cooked meats, sandwiches, and dry cured bacon.
The business has become quite well diversified, which has proved to be a vital factor in its long-term survival, particularly during livestock epidemics like the foot-and-mouth disease catastrophe in 2001. The company identifies 6 specific activities: 1) Fresh Pork (Cranswick Country Foods); 2) Gourmet Sausages (Lazenbys, which was acquired in 2000; 3) Traditional Dry-Cured bacon (Cranswick Gourmet Bacon Company); 4) Cooked Meats for the deli and pre-packed markets (Cranswick Convenience Foods); 5) Charcuterie (Continental Fine Foods); and 6) Sandwiches (The Sandwich Factory & North Wales Foods).
Cranswick has been very successful at growing both organically and through acquisition. Last year the company exited the Pet Food market, which left it clearly focussed on the supply of food to the UK grocery retailers, the food service sector and other food producers.
The success of Cranswick through time can be seen by the 20 year uninterrupted increase in profit before tax, starting with £0.9m in 1990 and rising to £43.8m in the year ended 31st March 2010. This means that Cranswick has shown a very impressive growth rate of over 21% per annum.
Cranwick’s principal Competitors are: a) The Irish quoted Greencore Group plc which acquired Cranswick’s UK convenience food competitor in Hazlewood Foods Plc in 2001; b) Moksel AG, which is a German manufacturer, processor and supplier of meat, poultry, sausages, fish and snacks products. c) Northern Foods Plc in the UK; d) Smithfield Foods Inc., which has pork operations spread across the globe, including the USA, Mexico, Europe and China; and e) Uniq Plc, which has a UK market leading positions in chilled prepared foods and co-pack branded products including sandwiches and wraps. Its customers also include the major UK food retailers, food service businesses and branded food manufacturers.
The company seems to be well-managed and the management are excellent communicators in all their dealings with shareholders.
The Directors have a small interest in their company, representing 0.8% of the issue share capital. The directors have only been sellers of shares in the 365 days to 28th October 2010. These shares were awarded to the Directors through the share company option scheme.
ANNUAL RESULTS AND TRADING UPDATE
Cranswick’s trading year end is to March. The results for the year ended 31st March 2010 showed sales of £740m (up 22% on 2009), an operating profit of £45.9m (up 19.6%) and a profit before tax of £43.8m (up 26.1%). The adjusted earnings per share (“EPS”) were 69.70p, up 29.8% on the previous year. The full dividend per share was 25p. Return on capital employed (“ROCE”) was 31.7% for 2010, which demonstrated again how efficiently Cranwick are at managing their capital. Over the years 2006 to 2010, the ROCE has stayed consistently between 29% and 35.5%. Net gearing was 87% at 31st March 2010, which was down substantially from 137% in 2009.
Cranswick’s share price rose about 4% after the trading statement for H1 was released on 4th October 2010. The company’s full interim results will be published on 15th November 2010. The trading statement was positive with underlying turnover up 8% and further progress being made on the integration of the CCF Norfolk acquisition, which is now reporting record volumes of processing at their site. Overall margins are said to be in line with management expectations, which we assume to be comparable to last year. October will see the Lazenby sausage factory extension being completed, as well as the new abattoir at Cranswick’s main pork processing site in Hull. The company also disclosed that the extension of the Sherburn-in Elmet air-dried bacon facility near Leeds is well advanced.
Cranswick did a major deal with UK Supermarket Chain Morrisons. On 9th July 2010 Cranswick’s Deeside cooked meat facilities were sold to a subsidiary of Morrisons called Farmers Boy (Deeside ) Limited. In return for the transfer Cranswick has received a 49% stake in Farmers Boy. The effect of this transaction has led to headline turnover at Cranswick plc increasing 12% during H1.
The trading statement was also positive on cash generation. Although not specific, management stated that cash generation from operating activities had been strong during H1 and that net debt at the 30th September 2010 was substantially lower than a year ago and below the £54m net debt reported at 30th June 2010.
WHAT IS THE BUSINESS WORTH?
We have used a discounted earnings model to value Cranswick. We note that Morningstar’s broker consensus numbers of for the years ending 31st March 2011 have moved little over the month, being down by +0.02p to 73.18p, although they crept up +0.22p over the last three months. As for the 2012 forecasted earnings the consensus EPS numbers have been revised up by +0.31p over 1 month and down by -1.23p over the last 3 months to stand at 78.57p. We have used these broker estimates as part of our discounted earnings valuation model. For 2011 and 2012 we are assuming turnover of £780m and £825m and operating profits of £49.7m and £53.3m. The operating margins of 6.37% and 6.46% are close to the margins of 6.2% for the full year ended March 2010. The dividend is expected to be 26.91p and 28.94p giving a dividend yield 3.03% and 3.26%.
From 2013 onwards we used our own numbers. These were based on the assumption that earnings per share will grow at an annual rate of 5% per annum. We consider this growth rate to reasonable in view of the historic growth rate and the underlying growth rate achieved over the first 6 months of the current 2010/2011 year. We value the company at 991p, which represents a potential upside of 11.7% to the current offer price of 887p. Brokers Panmure Gordon reiterated their HOLD recommendation with a price target (PT) of 880p on 5th October. Brewin Dolphin and Evolution have issued BUY ratings on 5th October and 14th September and have PTs of 1015p and 940 respectively, which puts our valuation somewhere in the middle.
CONCLUSION
We think that buying Cranswick means acquiring a part of the sausage manufacturing business which traditionally does well in a recession, as consumers seek better value for their money. Cranswick is one of the market leaders among sausage makers and continues to add to its brand value through JVs with retailers and successful marketing campaigns, such as the Jamie Oliver Range of sausages. The management give regular detailed trading updates and are prepared to grow the business through acquisition and expansion of internal capacity. The stock is fundamentally cheap, pays a nice 3.0% dividend yield, generates significant cash and has an incredible long -term track record of consistent above-average earnings growth.
FACTFILE
Cranswick’s products are mainly supplied to the UK food retail, food service and food manufacturing sectors. The company’s shares are listed on the London Stock Exchange and can be found under the Bloomberg ticker CWK:LN