Bakk-it or Bakk-off? Should you in­vest in hum­mus and pizza seller Bakka­vor?

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Hav­ing joined the stock mar­ket at 180p in Novem­ber 2017, shares in food group Bakka­vor (BAKK) have since drifted down to 164p.

One pos­si­ble ex­pla­na­tion is a neg­a­tive read-across from quoted peer Green­core (GNC) which has had mixed for­tunes with its UK and US ex­pan­sion.

Also weigh­ing on the share price are tough mar­ket con­di­tions, con­cerns about in­put cost volatil­ity and the sup­ply chain post Brexit, not to men­tion a share over­hang with in­vestors fac­tor­ing in po­ten­tial di­vest­ments by 25% share­holder Bau­post.

While this is a murky sit­u­a­tion, it is still worth ex­plor­ing how Bakka­vor makes money, given it is a mem­ber of the pres­ti­gious FTSE 250 in­dex.


Bakka­vor is the lead­ing provider in the large, fast-grow­ing UK fresh pre­pared food mar­ket, be­ing driven by struc­tural trends to­wards con­ve­nience, and is a busi­ness fo­cused on build­ing long-term sus­tain­able growth in the UK, US and China.

Com­pet­i­tive strengths in­clude strong ca­pa­bil­i­ties in sal­ads, ready meals, pizza and desserts. Bakka­vor also caters to the more af­flu­ent din­ner party set through prod­ucts such as hum­mus, dips and ar­ti­san breads. Sus­tain­able

com­pet­i­tive ad­van­tage stems from Bakka­vor’s sheer scale and close part­ner­ships with cus­tomers.

Fo­cus­ing on re­tail­ers’ own la­bel brands, Bakka­vor has dom­i­nant sup­ply po­si­tions with key cus­tomers in­clud­ing Tesco (TSCO), Marks & Spencer (MKS), J Sains­bury (SBRY) and Waitrose, while also sup­ply­ing WM Mor­ri­son (MRW), Asda, Aldi

and Co-Op.

It has early-stage con­ve­nience food op­er­a­tions in China and the US, sup­ply­ing re­tail and food­ser­vice cus­tomers with ev­ery­thing from sand­wiches and bur­ri­tos to ready meals.

Sig­nif­i­cantly from a growth in­vestor’s per­spec­tive, sales vol­umes are grow­ing with all key over­seas cus­tomers due to new store open­ings and the in­tro­duc­tion of new ranges.

Ad­justed EBITDA mar­gin has been ris­ing since 2014 and man­age­ment see their charge grow­ing sales in line with the 4-5% cat­e­gory growth rate with mod­est mar­gin gains, al­though raw ma­te­rial cost in­fla­tion rep­re­sents a mar­gin head­wind.


Bakka­vor is 50%-owned by Ly­dur and Agust Gud­munds­son, who founded the busi­ness in Ice­land in 1986 as a fish prod­ucts man­u­fac­turer and ex­porter.

The busi­ness grew ag­gres­sively dur­ing the 2000s, rid­ing the wave of a credit boom that blew up quite mess­ily. Given its his­tor­i­cal is­sues with debt, delever­ag­ing has been a pri­or­ity for man­age­ment ever since Bakka­vor delisted from the Ice­landic stock ex­change in 2009 and con­verted into a pri­vate lim­ited com­pany.

From 2010 on­wards, Bakka­vor be­gan ex­it­ing low mar­gin busi­nesses and low growth ge­ogra­phies, then sim­pli­fied its cor­po­rate struc­ture with a new par­ent com­pany domi­ciled in the UK in 2012.

In 2016, Bau­post, the Bos­ton-based hedge fund run by renowned value in­vestor Seth Klar­man, be­came a sig­nif­i­cant share­holder with a €163m in­vest­ment for a 40%

eq­uity stake. As part of this process and the prepa­ra­tion for an IPO, mainly to al­low Bau­post an exit, Bakka­vor re­fi­nanced its bank fa­cil­i­ties and high yield bonds in March 2017.


The UK is Bakka­vor’s big­gest mar­ket at 90% of to­tal turnover and here, thanks to scale and op­er­a­tional lever­age, it makes an EBITDA mar­gin of 9.1%. Bakka­vor is geared into the con­sumers’ quest for fresh, healthy and con­ve­nient chilled foods, al­though re­tail price in­fla­tion and sub­dued con­sumer de­mand are ma­te­rial head­winds.

In­ter­na­tional rep­re­sents a po­ten­tially huge growth op­por­tu­nity for Bakka­vor, al­though it only ac­counts for 10% of group sales at present.

Mar­gins in the over­seas busi­ness, where cus­tomers span Costa, Star­bucks, KFC, Pizza Hut and McDonald’s, have scope to move higher on fixed cost lever­age as vol­umes grow.

Bakka­vor is un­der­tak­ing an am­bi­tious in­vest­ment drive to ex­pand its ca­pac­ity and ca­pa­bil­i­ties over­seas – in­vest­ing in a new fac­tory for a key cus­tomer (HEB) in Texas and with a new state of the art fac­tory in East China set to be­come op­er­a­tional in the fourth quar­ter of the year – al­though such ex­pan­sion car­ries ex­e­cu­tion risk and re­turns are un­likely be­fore 2020.

The lat­est half year re­sults were solid rather than spec­tac­u­lar, show­ing sales up 0.8% to £910.4m, with like-for­like rev­enue edg­ing 2.8% higher to £910.1m and pre-tax profit ris­ing 38.9% to £47.1m.

We note with in­ter­est the 7.3% rise in free cash flow to £32.4m and a re­duc­tion in net debt from £368.2m to £269.8m, as well as signs of sales mo­men­tum build­ing into the sec­ond half, al­though man­age­ment’s cau­tion about in­put cost volatil­ity proved a trig­ger for mod­est down­grades to outer year es­ti­mates.

Draw­ing con­fi­dence from its strength­en­ing balance sheet, Bakka­vor has made its first UK ac­qui­si­tion in a decade, snap­ping up sweet bak­ery goods pro­ducer Hay­dens Bak­ery from bombed-out Real Good Food

(RGD:AIM) for £12m.

The deal in­creases the breadth and depth of Bakka­vor’s desserts range and man­age­ment plans to grow sales and move Hay­dens from a break-even po­si­tion into profit.

On the down­side for the group as a whole, any sus­tained in­crease in labour costs, labour short­ages post-Brexit or raw ma­te­rial in­put costs could ma­te­ri­ally af­fect mar­gins. Fur­ther­more, the bulk of Bakka­vor’s out­look is still tied to its top four cus­tomers.


In­vest­ment bank Beren­berg fore­casts a near-dou­bling of ad­justed pre-tax profit from £56m to £102m this year, ahead of £110m in 2019 and £121m in 2020.

On these es­ti­mates, Bakka­vor swaps hands for 11.3 times es­ti­mated 2018 earn­ings, which looks fair value given the un­cer­tain­ties that hang over the busi­ness.

While there is rea­son­able earn­ings growth po­ten­tial and a prospec­tive 3.9% div­i­dend yield, we’re con­cerned about ris­ing food prices near-term and be­lieve the shares could get a lot cheaper. That said, this is def­i­nitely one to watch should the val­u­a­tion be­come more ap­peal­ing.

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