Questor share tip: Falling pig prices save Cranswick's bacon

Cranswick
£12.73-4p
Questor says HOLD

CHEAPER pig prices will help profit recover at Cranswick, Britain’s largest pork processor, as it starts its new financial year.

Mark Bottomley, finance director, said pig prices had fallen from a record high of 173p per kilogram (p/kg) before Christmas, to about 163p/kg today. With the average pig weighing between 75kg and 80kg, the 6pc dip in prices should help boost company profits over the next 12 months.

After a difficult year for the pork meat industry there are signs of conditions improving. Pig farmers have seen the prices of wheat and soya fall, having a knock-on effect on the cost of animal feed.

The mild winter has also boosted animal numbers from the breeding season. When combined, these two factors have cut raw material prices for Cranswick.

The FTSE 250-listed sausage maker said it has also enjoyed strong growth in most of its product categories. Sales for the year ended March 31 rose 13pc, helped by strong demand for pork in Asia and new lines of savoury pastry products.

Cranswick has invested £20m in its production facilities during the past 12 months. This included a new gourmet pastry facility in Malton, North Yorkshire.

Mr Bottomley said sales of sausage rolls and pasties in the three months ended March 31 were three times higher than in the same period last year. The company has signed a significant distribution agreement with Marks & Spencer for these pastry products, which are sold at a higher margin than the rest of the group’s products.

Elevated pig prices during the past 12 months mean that despite Cranswick’s sales rising, adjusted pre-tax profits in the annual results, due on May 19, are expected to be flat at about £50.8m, from £49.3m a year earlier.

However, during the next 12 months analysts are expecting revenues to rise 4pc and break the £1bn barrier. If this is combined with a profit margin recovery, helped by lower pig prices in the future, then adjusted pre-tax profits are expected to increase by almost 10pc to £55.3m. Questor thinks that looks conservative, leaving room for upgrades later in the year.

Another reason the shares are a decent bet is the company’s strong cash generation. Investec analysts estimate the company made spare cash of about £31m for the financial year just ended, and they expect that to rise to £38m during the next 12 months.

That covers the dividend payments of £15.4m, or 32p per share, more than twice. The annual dividend is forecast to increase by 5pc in each of the next two years.

One of the most encouraging signs at Cranswick is that it pays for investment and expansion out of its own cash, without having to raise debt.

After paying for the new pastry facility and a pig breeding specialist, net debt for the year ended March 31 is expected to be about £19.4m, down from £20.1m a year earlier. This is well below previous analyst targets of about £29m.

The sausage maker’s shares have had a strong start to the year, increasing by about 6.5pc and easily outpacing the 2.5pc rise in the wider FTSE 250.

The shares are trading on 15.6 times forecast earnings, but that falls to 14.1 times next year, if profits recover. Cranswick has historically demanded a slight premium to other food producers due to its pricing power, which has protected profits during recessions.

When Questor last looked at the shares (£10.96, Hold, October 8) we highlighted the benefit of falling pig prices.

There is room for profit upgrades here and we rate this as a core investment, but will wait for another quarter to see if the low price levels stick. Hold.