Will Greencore’s rebound tempt investors – or private equity – to take a bite?

Investors have found shares in Greencore, the largest sandwich maker in the UK, about as palatable as one of its chicken wraps that has been left for days in a school locker, over the past 17 months.

The food-on-the-hoof specialist was one of the biggest Irish plc casualties of Covid-19, with its sandwich and salad sales plummeting as offices were deserted and ready-made meals succumbed during lockdowns to people, with more time on their hands, cooking from scratch.

Shares in Greencore plunged by two-thirds between February and October last year, before the company went about raising £90 million (€106 million) to shore up its balance sheet. Even today, the stock is trading in London at a little over half its pre-pandemic levels, at about £1.30. Gains earlier in the week, as the group reported a pretty decent rebound in trading as the UK economy continues to reopen, have been short lived.

With the stock trading at a discount to peers, according to analysts, what will it take for investors to have a nibble? Or will it be up to one of the private equity firms, who have been stalking FTSE 250 companies of late, to see value here?

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Revenues soar

Greencore reported this week that its revenues soared by 53 per cent in the three months to June, its third financial quarter, to £360.2 million – adjusted for currency movements and the sale of a molasses business late last year. Impressively, the figure was just 3 per cent below pre-Covid levels of the same quarter in 2019.

The company’s food-to-go business – spanning sandwiches, salads and sushi – reported 91 per cent annual revenue growth to £236.5 million as Boris Johnson’s government progressively eased pandemic restrictions. Still, food-to-go sales remained 9 per cent below the pre-Covid levels of the third quarter of 2019.

Sales of other convenience food categories, including chilled Thai curries and pasta dishes, soups, sauces and quiches, rose by 11.1 per cent on the year to £123.7 million. They were up 13 per cent on 2019.

Shore Capital analyst Darren Shirley saw the jump in ready meals as the big surprise, "perhaps indicating an easing in scratch cooking as folk are unlocked and return to work".

Greencore chief executive Patrick Coveney told analysts on a call on Tuesday that the company's own surveys showed that, pre-Covid, 45 per cent of UK consumers would have purchased a food-to-go item in the previous week. That plunged to a low of 15 per cent in early April of last year as initial lockdowns took hold. But the latest figures point to 42 per cent penetration rates in recent weeks.

Market shift

“We’re also seeing a channel shift from city centre or central business district or a large hub travel locations to suburban, market town or convenience formats,” he said.

The group's supermarket, convenience store and discount retailer customers have increased their slice of the food-to-go market to 28 per cent from 24 per cent two years ago. Greencore has also taken more of that action, securing lucrative contracts from rival sandwich maker Adelie, which collapsed at the height of the Covid-19 shock last summer.

Coveney’s questionable push into the US, in the decade after he became chief executive in 2008, has left a lingering bad taste in the mouths of some investors – even if he managed to extract Greencore from that market at about the breakeven level with a $1 billion sale of the unit in 2018.

But the chief executive locked in during the pandemic, keeping production going throughout, maintaining a tight rein on costs, managing the balance sheet, furloughing and rehiring thousands of staff to meet demand – and controlling raw material and labour inflationary pressures, for now, at least.

While we’re far from through the pandemic, Greencore showed it has an eye on the post-Covid world by announcing this week that it will soon start a large trial of recyclable, paper-based sandwich packaging with key customers Sainsbury’s and Co-op.

Goodbody Stockbrokers highlighted in a note to clients this week that the stock, at 12.6 times earnings estimates for next year, is trading at a “significant” 30 per cent discount to peers.

Takeover target

"Furthermore, we believe we have taken a conservative view on profits only recovering to pre-Covid levels by [fiscal year 2024]," said Goodbody analyst Jason Molins. "Consequently, we consider current levels to represent a highly attractive entry point."

Even before Greencore reported strong quarterly figures, UK broker Peel Hunt highlighted the company as a potential takeover candidate earlier this month as it speculated on who is next, after a flurry of bidding activity on the FTSE 250 so far in 2021. It’s not alone.

However, betting on a takeover is a dangerous game at Greencore. Remember the hype in 2006 when developer Liam Carroll bought a 21 per cent stake in the group from financier Dermot Desmond and went on to build his stake up to 29.9 per cent?

The investment was seen as a play on Greencore's property assets at the time. Ulster Bank, which funded Carroll's share-buying spree, ended up having to place the stock on the market in 2009 in the wake of the collapse of the developer's property empire.

A bid approach from an unnamed party for Greencore in 2011 also came to nothing. Meanwhile, market speculation about the group being a takeover target in 2018, following a share price slump, went nowhere.

Damian McNeela, an analyst with London investment bank Numis, is not convinced Greencore will attract bid attention now, either.

“We think that Greencore does have some attractive characteristics such as leading market positions and strong cash generation but that the failure of Adelie – which was previously owned by private equity – may dampen the enthusiasm of other potential acquirers,” he said. A cautionary note, indeed.