Here’s a fresh way to pick up a tasty slice of profits – from chilled food
GO into any major supermarket and you will be greeted by chilled cabinets filled with a tempting array of freshly prepared food to take home, unpack and eat – macaroni cheese, chicken tikka marsala, crispy duck, bags of salad, exotic breads and a plethora of naughty but nice desserts.
The UK is more advanced than any other country in the world at making these types of products and the market leader is London-listed
Bakkavor.
Bakkavor shares are £1.36 and should increase in price this year and beyond, as the company is ambitious, experienced and highly innovative. The group pays a generous dividend too, so the stock yields almost 4.5 per cent.
Bakkavor has worked in the fresh produce field for decades, building long-term relationships with customers such as Tesco, Marks & Spencer, Sainsbury’s and Waitrose. Preparing fresh food for these supermarket giants is no mean feat. Orders come in before dawn each morning, dishes are prepared from scratch and sent out just few hours later, to be on the shelves when stores open the following day.
Requests can change significantly from one day or week to the next but, in every case, Bakkavor needs to make sure that the raw materials are there, the staff are in place and the meals can be made.
The group makes more than 12 million products every week, including tons of garlic bread, hummus and every variety of pizza, from margherita to wood-fired fig, prosciutto, speck and gorgonzola.
These products are big earners for supermarkets so substandard wares will not cut it. They need to look good so customers want to buy them and taste good so shoppers come back for more.
Fashions change too and Bakkavor needs to be ahead of the game so it can respond to new trends. The group prepares around 2,000 different items and last year alone, introduced 500 new ones, quietly withdrawing less popular wares.
Vegan and vegetarian meals are all the rage now, for example, so Bakkavor launched a series of dishes for plant enthusiasts, such as butternut squash nut roast and mushroom stroganoff.
At the other end of the scale, desserts are hugely popular and Bakkavor has increased its presence here, making two acquisitions in the past two years and supplying treats such as profiteroles, custard tarts and cheesecake.
The past few years have been particularly difficult for food manufacturers. Inflation has been rife across the industry, with prices of dairy products, meat, fruit and vegetables rising steadily from 2016. Labour costs have risen too and consumers became increasingly anxious as the Brexit stalemate persisted.
Now, there are signs of change. Food inflation has begun to subside and consumer sentiment appears to be improving. Wages are still rising but this may encourage workers to indulge themselves with freshly prepared dishes, which tend to cost more than their frozen or tinned equivalents.
Bakkavor has held its own through the hard times, using its scale to secure the best deals with suppliers, improving operations wherever possible and working with supermarkets to limit price increases for consumers. Looking ahead however, the company is set to benefit as conditions improve.
Bakkavor is expanding internationally too, with growing businesses in America and China. Surprisingly, the US is way behind Britain when it comes to fresh, prepared food, but Bakkavor is working with regional supermarkets to introduce them to the joys of chilled, not frozen, ready meals, fancy breads and Middle Eastern dips.
In China, Bakkavor’s customers are not supermarkets but Western coffee shops and restaurants, such as Starbucks and Pizza Hut. Coronavirus has clearly affected business in recent days but the long-term outlook is promising. Starbucks is opening hundreds of new stores every year in China, Western food is all the rage and Bakkavor is at the forefront of creating tempting morsels that appeal to local tastes.
The group should not be overly affected by the Wuhan virus either, as China accounts for little more than 2 per cent of annual profits.
Bakkavor was founded in the 1980s by Icelandic brothers, Agust and Lydur Gudmundsson. Having shifted their business to the UK in 2000, the duo overexpanded in the early noughties and came to grief during the financial crisis. They seem to have learnt their lesson since. Today, chairman is Simon Burke, a veteran of the UK corporate sector, group borrowings are low and the firm is focused on steady growth and decent dividends.
Results for 2019 will be out at the end of this month and brokers expect sales of £1.9 billion and profits of £92million, rising to £2billion and £98million this year. A dividend of 6p is pencilled in for the year just ended, putting the stock on a yield of 4.4 per cent.