Description

Thesis:

I recommend purchase of shares of Cranswick PLC (CWK LN).  It is a vertically integrated producer of premium, fresh and added value food products.  It has grown revenues at more than 5% per annum on an organic basis for more than a decade and is selling for less than 15x my forward earnings estimate.  For a quality business with good returns on marginal capital, low debt levels, and decent growth prospects, in the current interest rate environment, it is far too cheap.

Business description

Vertically integrated producer and supplier of predominantly fresh food, including pork, poultry, convenience and gourmet products.  It also produces cooked meats, including bacon, roast in the bag chicken, added-value marinated ranges for barbecue season, and sausages.  Company owns pig breeding and rearing activities, feed mills, hatchery and broiler farms for chicken.  Over 30% of pigs processed at its facilities come from owned farms, and 100% of chicken.

Company supplies UK grocery retailers, food service sector and other UK and global food producers.  Company exports products to China, Japan, Korea, the Philippines, South African countries such as Angola and Liberia. 

Historical performance

FY 2012 (ended 03/31/2012) saw 10.3% organic revenue growth and 5.7% adjusted EBIT margin.

FY 2013 saw 5.3% organic revenue growth and 5.7% adjusted EBIT margin.

FY 2014 saw 12% organic revenue growth helped by significant price inflation, and adjusted EBIT margin fell to 5.4% due to increased price of raw materials.

FY 2015 saw 0.3% organic revenue drop while volumes rose by 2%.  Adjusted EBIT margin rose to 5.8% due to declining raw materials costs.  Adjusted EBIT = L 58.7MM

FY 2016 saw 4.7% organic revenue and 9.7% organic volume growth as lower pork prices were passed through to the customers.  Adjusted EBIT up 13.7% to L 65.7MM, and adjusted EBIT margin = 6.4%.

FY 2017 saw 12.7% organic revenue growth driven by volumes up 15%, and adjusted EBIT margins fell from 6.4% to 6.1%.   Adjusted EPS = GBp 120.9

FY 2018 saw 12.7% organic revenue growth and operating margins rose to 6.3%. 

FY 2019 saw 0.2% revenue decline and EBIT fell by 0.5%.

FY 2020 saw 13% organic revenue and 10% organic EBIT growth.  EPS = GBP 156.

FY 2021 (ended 03/31/2021) saw 12.1% organic revenue growth, 13.9% reported, 26.1% operating income growth, revenue = L 1.9bn, adjusted EBIT = L 132.5MM, adjusted pre-tax profit = L 129.7MM and adjusted EPS = 199.3 pence.  Adjusted EBIT margin = 7.0%.  Margins rose due to stronger product mix, improved operating efficiencies, a full year contribution from the new poultry facility and strong capacity utilization across the business.   There were L 18.6MM of Covid-19 related costs incurred during the year, including L 9.8MM of staff bonuses.  Net debt fell to L 92.4MM on 03/31/2021, and L 20.8MM excluding lease liabilities, despite a lot of expansionary cap ex.  Company did not take any government assistance. 

H1 FY 2022 saw 6.6% reported and 6.4% organic revenue growth, driven by 4.1% volume growth.  12.3% increase in adjusted EBIT to L 69.6MM and 11.5% increase in adjusted EPS = 103.5 pence. 

Return on tangible capital invested in the business on un-leveraged basis = 17.6% in FY 2021. 

Adjusted operating profit = Reported operating profit – net IAS 41 valuation movement on biological assets – amortization of intangible assets. 

Future forecast

I expect the company to generate EBIT = L 150MM, and EPS = 225 pence in FY 2022 (ends 03/31/2022.)

For FY 2023 I expect EBIT = L 160-170MM, helped by the new breaded poultry facility and other expansionary projects. 

Starting in FY 2024 (begins 04/01/2023), I expect the business to grow top-line at 1-2% above inflation annually and margins to be unchanged to slightly up. 

Capital allocation

Historically, the company invested in the business organically and via occasional acquisition.  The balance of free cash flow was paid out in dividends.

Since return from investing in the business is comfortable above cost of capital, I am happy that the company is finding places to deploy funds.  

Management

CEO has been in the role since FY 2012, and joined the firm in FY 1991.  CFO has been in the role since FY 2009, and joined the firm in FY 2008.

a)   Quality – seem fine to me. 

b)     Incentives – short term annual bonuses based on operating performance.  Three-year incentive plans based on EPS growth (50% weighting) and TSR (50% weighting.)  Awards must be held for at least two years after vesting.  Post FY 2021, retiring executives will have to hold shares equal to greater than 200% of salary for the first twelve months after cessation of employment, and in the following twelve months at least 100% of salary. 

Capital structure

a)     L 19MM of net debt, and L 87.2MM including leases on 09/30/2021

b)     s/o = 53MM

Valuation

Market cap = 53MM * 36.6 = L 1.94bn

EV = 53MM * GBP 36.6 + L 19MM = L 1.96bn

EV/Adjusted EBIT = L 1.96bn / L 165MM = 12.25x (based on my estimate of FY 2023 (starts on 04/01/2022).

P/E = 14.7x based on my estimate of FY 2023 EPS.

Catalyst

None

Risks

Outbreak of African swine fever, or another disease affecting pigs or poultry in the UK. 

Catalyst

None