It has not been the most auspicious of starts to life as a listed company for Bakkavor. The supplier of fresh foods to most of Britain’s big supermarkets was set for a £1.7 billion flotation on the London stock market last October.
Weeks later it pulled the listing, citing market volatility, only to resurrect the plan a week later at a sharply reduced issue price of 180p, down from the initially guided range of between 195p and 235p.
Only 25 per cent of the company is freely tradeable on the market, meaning that the shares can be volatile. Having touched a high of 212½p during the months after the listing, which valued Bakkavor at just over £1 billion, the shares have plumbed a low of 174p and, closing down 4¾p at 172¾p last nightare below the new issue price. What to make of it all?
Bakkavor was founded in 1986 by the two Icelandic brothers, Agust and Lydur Gudmundson, as a seafood business, named after the street they grew up in. It now supplies fresh salads, ready-to-eat meals, pizzas, breads and salads in the UK and, to a far smaller extent, in the United States and China, and is Britain’s biggest supplier of hummus. The vast majority of its earnings come from its four main customers: Tesco, Marks & Spencer, Waitrose and J Sainsbury.
The brothers hold just over 50 per cent between them and Baupost, an American private equity investor, holds just under 25 per cent.
Its results covering the six months to the end of June, published yesterday, were only its third financial update to investors since the listing and were accompanied by the £12 million acquisition of Haydens Bakery, a maker of sweet buns, pies, tarts and doughnuts that supplies food retailers and coffee shops. Bakkavor’s performance in the first half was credible but hardly scintillating. Group revenues came in higher but they were down slightly in the UK, which accounts for almost 90 per cent of its turnover. Its cashflow was up, its debts lower and it is paying an inauguaral interim dividend of 2p a share.
There was, however, plenty of caution. Bakkavor has been facing higher costs for its ingredients, including milk and butter, flour and eggs, and said yesterday that it saw no signs of this changing soon. There is a tricky balancing act to play: Bakkavor may be able to pass on price rises to its grocery customers but they will pass this on in turn to shoppers, who will at some point refuse to pay, or buy less, leading to a fall in business volumes for the retailer and its suppliers.
There is no evidence of this happening yet at Bakkavor, which increased its trading volumes — probably with some help from the Royal Wedding, World Cup and the summer sun — and maintained its margins. It also said that it was maintaining its expectations for its full-year performance, which analysts reckon means pre-tax profits of a little more than £100 million on revenues of close to £1.9 billion.
Bakkavor has much that speaks in its favour. It is the leading supplier in all four of its product lines: salads, desserts, sandwiches and pizzas and breads. It is clearly embedded in the trading lives of Tesco, M&S, Waitrose and Sainsbury’s and it is managing its costs. The opportunities in its overseas markets of China and the US are substantial.
The shares are a disappointment, though. Given the uncertain environment there seems to be little in the way of a catalyst to push them higher, except perhaps when Baupost begins to reduce its holding, but with the price as it is why should it?
The owners of Bakkavor shares should clearly hold on: why sell at a loss?
ADVICE Avoid
WHYThe market is uncertain, the shares are depressed and there is little sign of that changing soon
Just Group
Oh dear. When Just Group published its annual results in mid-March this column recommended buying the shares.
At 130p then, shares in the retirement products and pension specialist stood at 88p last night, up ¾p on the day, but a fall over the nearly six months of more than 32 per cent that means that any investor who followed the advice will be nursing a substantial loss.
In fairness to Tempus the shares rose steadily in the weeks after Just Group’s impressive annual profits. The fall began in June, when the Prudential Regulation Authority, which oversees the stability of the financial sector, said that it might impose considerable additional capital requirements on all providers of lifetime mortgages (loans, mainly taken out by the retired, who want to liberate value from their home).
In Just Group’s case the financial impact of having to hold substantial extra cash to back this form of loan would be material but cannot be quantified until the regulator moves. So material that yesterday it put its half-year dividend on hold. The stock market has marked the group down heavily on the uncertainty — a decision is expected this year.
Just Group was formed from the merger of Just Retirement and Partnership Assurance early last year. The group, which speciaslises in retirement products, helps to fund private healthcare for older people and insures the risks associated with defined-benefit pension schemes.
The regulator is interested in the lifetime mortgages that Just Group sold between 2005 and 2015, about two thirds of its total portfolio of £6.8 billion.They do not feel risky: of the 50,000 lifetime mortgage loans made in 13 years only 13 have not been paid back in full and Just Group predicts that only a further ten will be problematic over the next decade. Nevertheless, it has cut the loan-to-value ratio on new loans and upped its age threshhold. That will not matter if the regulator gets tough anyway.
Just Group’s first-half results yesterday were otherwise excellent: retirement sales up 64 per cent, new business profits up 88 per cent. The fundamentals of its retirement offering remain highly attractive.
ADVICE Hold
WHYThere is no point moving either way until we have a regulatory outcome
