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Berenberg cuts Greencore target, starts Bakkavor at 'hold'
Analysts at Berenberg marked down their target price for Greencore despite the favourable growth prospects for the chilled assembled convenience foods market, especially in the UK.
"In a competitive UK grocery retail market, the chilled cabinet, in general, and private label brands, in particular, are the most dynamic areas seeing the highest levels of growth, innovation and support from the retailers looking to differentiate their offerings in relatively profitable categories," they explained.
The analysts also labeleld the 9.5 times 2019 earnings multiple that Greencore was trading, and sector peer Bakkavor´s 11.5 price-to-earnings multiple, "undemanding".
Despite that, they marked down their target price for the former from 305p to 250p, albeit while keeping their recommendation at a 'buy'.
In the same research note, they initiated coverage of Bakkavor at a 'hold' with a target price of 210p.
Nonetheless, they did note that: "Our DCF valuations of GBp320 for Greencore and GBp270 for Bakkavor imply further mid-term upside for both."
Significantly, Greencore was exposed to the higher-return food-to-go market, offering it broader channels and out-of-home eating occasions beyond just grocery retail, helped by its national distribution network.
Greencore's US business had also been truned from a minor upside option into a meaningful driver of group sales (45%) and EBITDA (30%), the broker said.
"While there has been recent volatility with some customers, Greencore is now delivering consistent profitable volume growth driven by its close branded customer relationships, with further operating leverage to come as its spare capacity is filled."
However, at Bakkavor international returns were not seen improving until 2020 at the soonest, with more ramp-up risks associated.