Investors fretting over geopolitical uncertainties, downbeat economic outlooks on both sides of the Atlantic and frothy valuations across the pond should consider tucking into an attractively valued, cash generative and dividend paying UK stock with defensive qualities.
One name that fits the bill is Bakkavor (BAKK), the chilled prepared food manufacturer with positive trading momentum, which is not only rebuilding its margins, but also reducing leverage. Shares believes this combination of improving returns and falling debt levels could drive a further re-rating of Bakkavor, even after a strong run over the past year or more.
The £872 million cap is also well-positioned should consumers cut back on dining out and spend more on food products that can be eaten at home and could treat investors to additional forecast upgrades, potentially as early as May’s first quarter update. Despite rising employment costs, this private label pizza-to-hummus maker remains confident of achieving a 6% operating margin by 2027, which suggests outer year forecasts could prove overly conservative.
ABOUT BAKKAVOR
Bakkavor, which joined the stock market at 180p in November 2017, is the leading provider in a large and growing UK fresh prepared food market being driven by structural trends towards convenience, while its presence in the US and China positions the group well in these high-growth markets.
Guided by CEO Mike Edwards, the FTSE 250 firm supplies UK and US grocers including Tesco (TSCO), Sainsbury’s (SBRY), Waitrose, ASDA, Morrisons and Marks & Spencer (MKS) as well as international food brands in China with everything from meals, salads and sandwiches to desserts, pizzas and bread, soups, sauces and more.
Focusing on retailers’ own label brands, the company’s competitive strengths include its sheer scale and close partnerships with customers, not to mention strong capabilities in salads, ready meals, pizza and desserts and the high service levels which are helping it to win new business.
TASTY MOMENTUM
Bakkavor is enjoying positive trading momentum with shoppers making more frequent trips to the supermarket, which has supported growing demand for the company’s fresh, convenient and high-quality meal solutions.
Impressive results (4 March) for the year ended 28 December 2024 showed adjusted operating profits fattening up more than 20% to £113.6 million, helped by positive volume growth and efficiency gains across all markets, and Bakkavor’s adjusted operating margin moved up from 4.3% to a better-than-expected 5%.
In the UK, the company generated 5.2% like-for-like growth which came from a welcome combination of both volume and price. The US business returned to growth in the second half, and the US margin should recover further, while losses in China were significantly pared, with 13.8% like-for-like growth in mainland China driven by retail and new food service customers.
Crucially, the FTSE 250 firm’s net debt fell by £36 million to a year-end £194 million, paring Bakkavor’s net debt to EBITDA ratio from 1.5 times to 1.1 times, at the lower end of the target range, despite capital expenditure and a generous 10% increase in the dividend to 8p. By reducing its debt load, Bakkavor’s finance costs are coming down, cash is being freed up which can be reinvested back into the business or deployed for earnings-enhancing acquisitions, while financial risk for investors is lessening.
For the current financial year, Peel Hunt forecasts adjusted pre-tax profits of £90 million rising to £93 million and £97 million in 2026 and 2027 respectively. Based on the broker’s 11.3p earnings forecast and an expected 8.5p dividend this year, Bakkavor trades on a palatable prospective price to earnings ratio of 13.3 times which implies scope for further multiple expansion, and the stock offers income seekers a juicy 5.6% yield.
Risks to consider with Bakkavor include any additional rises in labour-related cost inflation, or a sustained rise in raw material input costs, which could interrupt progress in delivering against margin targets.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
magazine
