Yahoo Finance At last, a cheap London-listed stock that top investors are interested in
Investors are constantly being told that British shares are cheap. But cheapness alone is not sufficient reason to invest: shares will stay cheap if a company cannot grow its profits. To make money from cheap shares, investors need to identify the companies with better days ahead.
Greencore, Britain’s largest maker of prepackaged sandwiches, appears to be just that type of company.
At first glance, the London-listed, Dublin-based business is one that many would quickly dismiss. Selling sandwiches, ready meals, salads, sushi and sauces to big supermarkets, food service companies and convenience stores is a very hard market to make money from.
Profit margins are wafer-thin as customers are not shy of using their buying power to keep their costs down.
However, there are signs that the relationship between suppliers such as Greencore and their big retail customers is moving away from one focused purely on driving down prices to one where they work together so they can grow.
This is the kind of catalyst that is attracting some of the world’s best “value” fund managers – those who seek to buy shares when they are cheap and out of favour – to Greencore’s shares.
Five of these top investors, each among the top 3pc of the 10,000 equity fund managers tracked by the financial publisher Citywire, own shares in Greencore. That results in the stock’s AA rating, just below a top AAA rating, from Citywire Elite Companies, which rates companies on the basis of their backing by the world’s best fund managers.
Over the past two years, Greencore’s sales and profits have been recovering from the devastating impact of the pandemic, when office workers stayed at home and sales of lunchtime sandwiches and wraps slumped. Rising food and energy costs have also hurt the business.
The shares have rallied by 23pc over the past year as the business has recovered, although at 102.4p they are trading at roughly a third of their value at their 2016 peak.
But Greencore is confident that its recovery still has some way to go. Following a strong trading update last month, its chief executive, Dalton Philips, told investors who asked about 2024 and 2025 profit forecasts that “we should be hitting them and some more”.
His optimism comes from workers’ return to the office and trends that should help the food-to-go market to grow steadily. Combined with a number of “self-help” initiatives to improve Greencore’s efficiency, there are strong grounds for thinking that his confidence is well founded.
The company has improved its contracts with customers, under which half of its raw material and packaging costs can now be passed through in its prices. Greencore can also pass on wage costs, including next month’s £1 rise in the hourly National Living Wage, to its biggest three customers.
However, a significant proportion of sales come from food manufacturing sites that make little or no money. Greencore has shed some of its unprofitable lines and replaced them with higher-margin products but there is scope to do more.
Growing demand for premium sandwiches should help. Sales of these higher-margin products grew by 34pc from a low base last year.
Big customers such as Marks & Spencer and Sainsbury’s have teamed up with Greencore and are pushing hard in this area with encouraging results. They are looking to take market share from quick-service restaurants with their premium meal deals.
This year should deliver another rise in profitability as the company reaps the benefits of its efficiency drive and new contracts.
That said, Greencore is going to have to ask its customers for more money to offset higher wage costs and work hard to improve the performance of some of its manufacturing sites.
The company is confident that it is up to this task. If it is, investors can expect strong growth in profits over the next few years. City analysts forecast earnings per share to increase from last year’s 9.3p to 13.5p by September 2026.
The shares trade on just over 10 times forecast profits over the next 12 months, which explains their appeal to value-focused fund managers. That looks a good price given a growth outlook that appears eminently achievable.
Questor says: buy
Ticker: GNC
Share price at close: 102.4p
Phil Oakley is a contributing journalist for Citywire Elite Companies
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