November 26, 2012 4:23 pm

Cranswick resists pork pricing squeeze

Cranswick, the producer of sausages and pies, has succeeded in passing on pork price inflation to retailers, illustrating how power is gradually shifting towards suppliers as the economic downturn closes more factories.

Pork prices have risen some 60 per cent over the past four years. Recent US droughts have pushed feedstock higher and the price of a kilo of pig meat is now a record 160p. That has resulted in farmers worldwide culling their herds, and warnings to supermarkets that failure to pay up could result in severely depleted supplies of pork, bacon and sausages.

However, Cranswick, a link in the chain between farmers and supermarkets, said it had managed to recover some of the inflation from customers. Unveiling a year-on-year 5 per cent rise in underlying revenues to £418.6m in the six months to end-September, Martin Davey, chairman, said sales were not affected by the higher price stickers.

“Over the past few years, and even the last 12 weeks, spending on pig meat products continues to rise,” he added.

Group operating profit increased 17 per cent to £22.8m, boosted by the acquisition in June of Kingston Foods, which manufactures and distributes cooked meats.

The Hull-based company further gained from selling 2m kilos of “fifth quarter” parts – essentially offal – following the recent approval to ship direct to China. This, however, weighed on its working capital. Stocking up hearts and livers ready to ship was among the factors driving a £6.9m increase in working capital and near 50 per cent increase in inventories.

Analysts applauded the results, which were broadly in line with expectations, and the shares were up almost 10.5 per cent at 816.5p in afternoon trading. This is despite the fact that Cranswick warned that its second half, normally the stronger part of the year, would be closer to the first half.

Darren Shirley, analyst at Shore Capital, house broker, said the company entered the period facing “something of a perfect storm”, with rising input costs, new welfare requirements in the EU that come into effect on January 1, and an increase in pig prices. But the brokerage was maintaining its full-year forecasts on the back of management’s ability to cope with this, he said.

Diluted earnings per share rose from 29.2p to 35.7p and the dividend increases 4.4 per cent to 9.4p.

FT Comment

It should be the perfect business model. Chop up an 80kg pig, pack up the lean meat, process the less aesthetically pleasing parts (sausage sales were up a whopping 15 per cent) and ship the remains to China, where organs go down a treat. But this is a thin margin business at 5.5 per cent and thus vulnerable to further squeezes. Pork prices are likely to rise again alongside new European welfare measures and the impact from culled herds will feed through. Ahead of the results, Cranswick was trading on a forward EV/ebitda multiple of around 6 times, comfortably below its peers. Consider capital investment, shrinking free cash flow and the still-distressed consumer, and the subsequent narrowing of that gap looks over-exuberant.

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