Investors’ Chronicle: Hilton Food, Lookers, Belvoir

BUY: Hilton Food (HFG)

Acquisitions have expanded the company’s horizons and look set to define its growth prospects, writes Christopher Akers.

It is a time of strategic progress and more diversification for Hilton Food. More than three-quarters of volumes were posted outside the UK in these results, as the food packing company made key acquisitions, penetrated new markets, and announced its biggest ever full-year dividend.

Total sales volume growth of 5 per cent may look rather puny against the previous year’s 26 per cent uplift, but investors must bear in mind that demand was significantly impacted in 2020 by lockdowns and elevated levels of eating at home. This is still good growth in the circumstances.

Australasia was the standout in the results, posting revenue growth of 71 per cent to £1.3bn and volume growth of 33 per cent on the back of a new facility in New Zealand as the segment’s adjusted operating profit rose by over £5mn to £22.4mn. European markets struggled, by comparison, with volumes down 2 per cent and operating profit flat at £61.8mn — not helped by a fire at the Belgian facility — but over two years volumes were still up by an average of over 3 per cent a year.

But it is the recent acquisitions, and the impact these have on the company’s outlook, that are most intriguing. Hilton has entered the North American retail market for the first time after purchasing the smoked salmon producer Foppen last month, funded by a £75mn equity raise.

In the financial year, the company acquired the remaining 50 per cent of vegetarian and vegan proteins producer Dalco and entered the UK food service market via the purchase of the entire share capital of meat supplier Fairfax Meadow. Hilton’s operations have diversified further and the company looks set to benefit from its entry into new proteins.

Chair Robert Watson said that “our short and medium-term growth prospects are underpinned” by these latest additions to the business.

Management is bullish on the company’s ability to withstand inflationary and supply chain pressures. On the latter, supply chain software business Foods Connected posted more growth in the year.

Peel Hunt analysts said the company “has enhanced capability across categories and also its supply chain expertise, where we see Foods Connected and a focus on robotics as key differentiations”. The broker has the shares trading on 19 times forward earnings for the 2022 and 2023 financial years. This is more expensive than a competitor such as Cranswick — trading on a consensus 17 times forward earnings — but still looks undemanding given Hilton’s growth outlook.

HOLD: Lookers (LOOK)

The semiconductor shortage is expected to keep constraining the supply of new cars throughout 2022, writes Madeleine Taylor.

The “unprecedented appreciation” of used cars lifted revenues and gross profits at Lookers, prompting the auto dealership to declare its first dividend payment in more than two years. The 2.5p a share payout looks like a positive sign for the company, whose shares finally appear to be back on track after a tricky three years following both an investigation by the Financial Conduct Authority and an internal fraud probe.

New cars remained in short supply in 2021 due to a shortage of semiconductors, which created a roaring trade in second-hand vehicles. Margins on used cars rose by more than two percentage points from the previous year, reaching 8.8 per cent, and this, coupled with higher sales volumes, lifted gross profits by 53 per cent to £180mn in 2021.

Lookers said it had maintained fatter margins throughout the first quarter of 2022, due to robust consumer demand and tight control on costs. The auto dealer expected that the new car supply will continue to be “constrained for the remainder of 2022”.

New cars still accounted for a quarter of total gross profits in 2021, with volumes rising by 4 per cent despite showrooms remaining closed early in the year because of the pandemic.

Over the next two years, Lookers’ strategic priorities include getting into electric vehicles, rolling out cosmetic repairs for cars, and increasing its market share in used cars — with the aim of opening two more Cube Concept used car centres and roll out repairs to another 50 sites.

Progress on operating costs is also “set to result in a structurally more profitable business” in the future, said Numis. Nevertheless, supply and macro uncertainty led the broker to leave earnings forecasts unchanged, predicting a fall back in pre-tax profits to £52mn in 2022. We also see wild price swings in the automotive sector as reason to remain cautious.

HOLD: Belvoir (BLV)

The franchise model has again proven its worth with double-digit increases in statutory revenue and profits, writes Mark Robinson.

With a market capitalisation around the £100mn mark, Belvoir is a relative minnow on the property front, though its franchise model has proven its worth down through the years, at least judging by what management tags as “25 years of unbroken profit growth”. It also provides something of a microcosm in relation to the housing market and the levers which support it — a worthwhile consideration for investors given upward pressure on interest rates.

It’s been well documented, but the government has been putting the screws on the buy-to-let sector in recent years, both in terms of tax policy and environmental strictures. This has given way to an insufficient supply of available properties to rent. Whatever your views are on this segment of the property market, the reality is that private rents in the UK are rising at their fastest rate in five years, adding to the cost-of-living crisis for tenants up and down the country.

None of this seems to have had a negative impact on Belvoir’s performance through 2021, as the overall number of property transactions in the UK was up by a quarter on the 10-year average. Volumes were initially helped along by government support schemes, adoption of hybrid working patterns and the so-called “race for space”.

Long-established rental patterns are returning as Covid-19 loosens its grip, so demand for urban rental properties, especially among the young, has bounced back to a significant degree. That’s important for the company, as a weighty proportion of its revenues is generated through rentals, rather than sales. Its property division delivered a 27 per cent increase in the top line to £15.2mn, aided by the deal to acquire Nicholas Humphreys, a student lettings network. Belvoir also snapped up the mortgage advisory arm of the Nottingham Building Society (NBS), thereby dual-branding a further 26 NBS branches.

Those deals meant the company more than doubled its net cash M&A outlay through the period to £4.37mn, yet strengthening cash flows underpinned a one-quarter increase in its cash pile, while long-dated debt fell by a tenth. Add in the 18 per cent increase in management service fees, the “key underlying return from franchisees”, and it’s not difficult to appreciate why the shares were marked up on results day. The shares aren’t prohibitive at 14 times forecast consensus earnings, and they come with a prospective dividend yield of 3.3 per cent, but we remain circumspect given wider macro issues.

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