Shares in convenience foods manufacturer Greencore (GNC) dropped 5.9% to 95.8p as it missed earnings forecasts after being hit by Covid-related costs.
Greencore expects sales for the fourth quarter of the financial year ended 25 September 2020 to be 19% below the prior year’s level, and is guiding to full year adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) of about £85 million.
That is £17 million below Irish broker Davy’s forecast, after Greencore took more than £10 million of non-recurring Covid-19-related operating costs on the chin.
IMPROVING TREND
Encouragingly, the fourth quarter sales decline marked a major improvement on the 36% sales slump seen in the third quarter at the hard-pressed supplier of sandwiches, salads and sushi to major supermarkets, whose recent top line performance has been boosted by the reopening of the economy.
Greencore has been a key casualty of the coronavirus pandemic and associated lockdowns, which have combined to keep commuters at home and cause a slump in city centre footfall with office staff working from home.
In today’s unscheduled update, the chilled ready meals-to-frozen Yorkshire Puddings manufacturer reported a ‘progressive improvement in revenue, adjusted EBITDA and cash generation in Q4, supported by continued increase in demand for food to go categories’.
For the full year, Dublin-headquartered Greencore now expects to post sales of approximately £1.265 billion, down 14% year-on-year.
EBITDA MISS
‘The EBITDA miss reflects more pronounced negative operating leverage as Greencore’s operating model and network adjusted to an uncertain and changing demand backdrop,’ explained Davy.
Greencore conceded ‘UK consumer sentiment and broader economic activity remain both fragile and subdued’, but it has seen a ‘progressive uplift in demand for food to go categories through Q4 as the economy slowly reopened and as Greencore worked with its customers to tailor product ranges, formats and service models to this new environment’.
In another positive development, while Greencore temporarily stopped production at its Northampton site during August after a Covid outbreak, production was restored fully at the site by the middle of September.
Greencore added: ‘While fully recognising the uncertainties that lie ahead, the group is well placed to continue to build back the business in full year 2021’.
Year-end net debt is expected to be roughly £345 million, although the food producer stressed it ‘retains strong liquidity, with total committed debt facilities of £578 million and eligibility to access funding under the Covid Corporate Financing Facility’.
WHAT THE BROKERS ARE SAYING
‘No guidance has been provided (more likely in November), with the key unknown remaining the potential for further imposed local or regional mobility restrictions,’ commented Davy. ‘On first glance, we will lower our FY21 EBITDA forecast by circa 5%.’
Despite current challenges, Shore Capital concurs with management’s view that ‘the long-term can be exciting for Greencore, noting its strong leadership, business-wide capabilities and liquidity, plus the group’s clear agility, what we know are excellent customer relationships plus its category leadership and strong absolute capabilities in the British food system.
‘Greencore has been through the mill through no fault of its own. However, we do believe it will be more strategically relevant in the future in Retail and F&B and as such we can see why management is realistic, focused upon today but still ambitious and excited.’
