The £34m disposal of Napier Brown in May delivers material upside for Real Good Food LON:RGD financially and strategically. It has exited a cyclical and low margin business at a good price, transforming group growth prospects and risks. Opportunities to accelerate profit growth are now enhanced, with scope to deploy funds judiciously in organic and acquisition led investment.
Financial risk is significantly lower, allied to a substantial fall in price valuation ratios: EV/EBITDA for FY16E stands at 4.2x – a modestly valued investment opportunity, offering growth and backed by net balance sheet cash.
Strong balance sheet and cash flow: Following the disposal, the group has a net cash position, compared to a net debt/EBITDA of just under 6x pre disposal (taking the EBITDA of continuing businesses). With continuing operations well
invested, the net cash position brings opportunities to accelerate growth through selective acquisitions and selective organic investment. Operating cash flow is forecast to be about £8m for the year to March 2016, giving free cash flow per share of over 5p, albeit part of this is a benefit from the reversal of the Napier Brown working capital. Even without this, we anticipate significantly positive free cash flow, enhanced by much reduced and more consistent working capital requirements.
Margins robust & rising: Sub 1% historic EBITA margins rise to just over 5% in FY16E, and we would anticipate a further rise in FY17. Renshaw, the largest ongoing business returned 10.2% EBIT margins in FY14, and is estimated to rise to over 12.0% in FY16E, when it should benefit from the brand and other investment of recent years.
Well-invested growth business: Real Good Food has been investing consistently in facilities, capacity, brand development and marketing, opening new channels – also enhancing senior market-facing sales personnel. Real Good Food comprises a highly value-added set of complementary businesses with strong and developing brands, notwithstanding Garrett Ingredients’ exposure to the currently difficult commodity cycles of dairy and sugar.
Real Good Food is a UK based food manufacturing company. The largest operation Renshaw, manufactures baking and cake decoration products, selling to consumer and business sectors
You can download the full report by Hardman & Co here: RGD July15
