Real Good Food Plc (LON:RGD), 2016 has been dominated by the post-disposal period following the major and successful strategic sale in May 2015 of the Napier Brown sugar business. There has been subsequent focus on re-structuring into the three pillars. Thus Real Good Food is a food manufacturing business serving sectors including specialist retail, manufacturing, foodservice, grocers, wholesalers and export. Margins vary significantly between divisions and we observe the efforts to raise margins in the lower two pillars whilst growing the whole business, emphasising the more discerning and demanding segments of the respective markets. AGM 12.9.2016.
► Three pillar strategy: Real Good Food (RGD) in the past year has grouped its operations into three Pillars. This reflects maximisation of cross-selling within each, with a focused and nimble approach.
► The Pillars’ attributes for investors: The Cake Decorating Pillar achieves good, improving margins and we estimate top line growth nearing 10% in future years. The other two are generating small losses historically. We see an improvement in the current year and onwards. This is a result of specific, targeted changes in customer mix (allied to product/ service mix) in each of the two.
► Valuation: RGD is valued inexpensively, even before attributing any valuation to the two Pillars currently trading around breakeven (on £57.2mE sales). £6.2m current year EBITDA understates the potential, given the profit turnaround scope. 7xEV plus 20% sales on the breakeven businesses equals £54.4m EV (fully diluted) – an illustrative first stage in the move to a realistic valuation point.
► Risks: There are cost pressures and these are being countered as part of the strategic capex for growth. c60% sales in the biggest operation within Premium Bakery is to multiple grocers – a market where the clients are under price pressure. Debt is low but rising.
► Investment summary: Those Pillars which are trading just above breakeven have turn-around potential as they increasingly focus on value-added clients/ routes to market. But progress has been slow. Cake Decoration sales growth includes exports. It is achieving 13.5% margins. After a great strategic disposal in 2015, this year has seen frustrations which have weighed disproportionately.
