Real Good Food Plc (LON:RGD) have a focus is towards premium product segments and routes to market via specialists who bring premium pricing opportunities. This includes focus on supporting the various brands, the costs of which have always been included in our forward estimates. However, Monday’s update is negative in that the 2.9% (year to March 2015 continuing businesses) EBITA margins are now estimated to rise to only 3.2% in FY16, before (we estimate) rising in FY17E. We reduce FY16E PBT from £5.2m to £2.7m, suspending FY17E. March 2016 we estimate net £2m debt.
► 1st February: “The Board now expects that within the continuing business EBITDA will remain flat year on year, as this investment, when combined with other one-off events within the various business divisions, has led to a short term impact on margins… confident however that the negative impact on margins is short-term.”
► Profit estimates FY16E reduced £2.5m: H2 profits expected to rise vs seasonally lower H1 figures, which were announced 11th November. We understand there are a number of small short term profit pressures, predominantly from areas of the business already on low margins. FY17E is suspended, but strategy intact.
► Strategy and outlook: We estimate businesses in FY16E excluding Renshaw and Rainbow Dust Colours and pre the whole Group central overheads charge is losing a modest amount of money. The c.£60m sales in these lower margin businesses has scope to be profitable and do not compromise the Group.
► Risks: Real Good Food financial gearing is de minimis. The (estimated) loss making businesses are operating in competitive areas such as multiple grocers or still fledgling. Former are expanding to next phase and latter have already executed significant growth to new clients with strong margin potential.
► Investment summary: Real Good Food Plc trades today on 6.0x EV/EBITDA FY16E. It operates offer attractive growth markets, through their premium pricing nature. Real Good Food has cemented its transition to these growing sales channels routes to growth markets. There have been various elements of turbulence in other areas, blowing temporarily off-track.
