Real Good Food Plc (LON:RGD) has transformed its prospects through corporate action over the past nine months. The market has yet to catch up with this. Importantly, the mix of business is biased to higher margin and growth markets. For example, Renshaw (72% Group operating profits) reported H1 10.8% operating margins up from 9.3% through a focus on sales mix. We therefore see good margin expansion for FY16E and strong prospects thereafter. Trading in the seasonally important Q3 has seen “strong sales trends… at Haydens Bakery and Cake Decorating Businesses.”
► H1 results 11th November: Sales £46.6m (£45.6m); Gross margins 26.8% (23.2%); Operating profits £1.1m (£0.1m). Loss before tax £0.2m, breakeven adjusted profits (ex amortisation). Profits are always H2 weighted. Note, sales rise £1.6m from a successful acquisition, which contributed maiden £0.7m H1 EBITA.
► Profit estimates unchanged: We maintain our profit estimates for the Group for both FY16E and FY17E, following the £1.0m rise in operating profit reported H1. We estimate a £2.67m operating profit rise for the full year – very much on course, albeit November and December trading are always crucial.
► Valuation: Real Good Food is at 40% peer group PE discount (year two forecast, 2017E). See our 23rd September publication. Currently Real Good Food pays no dividend but has instigated capital restructure to facilitate payment which we would expect for FY17E. It has a selection of opportunities for organic and acquisitional investment, but dividends are coming. Net cash, so low EV ratings.
► Risks: The history of Real Good Food has been one of high financial gearing and we do not expect this to be replicated. Real Good Food is cautious on exposure to multiple grocers’ pricing pressure but some 15% (estimated) profits are derived from this area. Garrett Ingredients’ markets are commodity related.
► Investment summary: Many of the food manufacturing sectors in which Real Good Food operates offer attractive growth opportunities, through their premium pricing nature. Real Good Food has cemented its transition to these growing sales channels routes to growth markets. Its focus suggests more of the successful acquisitions which it recently achieved in Rainbow Dust Colours.
