Pizza, sandwich and biscuit manufacturer Northern Foods was the FTSE 250’s main casualty in early Tuesday trade after the food producer’s first-half preliminary numbers implied weak sales growth in second quarter, though management continues to see first-half results in line with its expectations.
By 9.15am, Northern Foods shares had shed 4p or 5.6% to 67.2p, though the FTSE 250 index added 107.9 points or 1.2% at 9,090.4.
The company this morning said results for the 26 weeks to September 26 will be “consistent with management expectations” and added that while market conditions remain competitive, it has delivered “a solid operating performance and continue to drive the business forward.”
Group like for like sales increased by 2.9%, with volumes up 2.5%, and Northern Foods experienced “strong growth” underlying revenue in Chilled (up 8.8%) and Bakery (up 3.9%), though this was partly offset by a 7.5% decline in its Frozen division.
Despite management’s upbeat tone, a number of analysts were wary of today’s figures.
Numis Securities analyst Nicolas Ceron said the first-half trading statement “seems weak” with like-for-like sales growth of 2.9% a fair way off his own forecast of 5.7%. Ceron also pointed out that this implies a decline from 5.5% sales growth in the first quarter to just 0.3% in the second. Furthermore, this excludes the impact of the company’s Fenland closure, which is around 3%-4% negative on Numis’ estimates, thus “real organic growth is negative,” Ceron concluded.
“The group has a history of delivering strong sales growth without profits growth,” the analyst commented, adding that “It seems that when they focus on profits they find it harder to deliver the sales growth.”
Following today’s update, Numis raised its target price on the Northern Foods stock to 54p per share from 48 previously to reflect the market rerating, but downgraded its recommendation to Sell from Reduce. Ceron said he does not believe the dividend is well covered compared to other stocks in the sector.
Panmure Gordon’s Graham Jones also downgraded his rating this morning—to Sell from Hold, with the target price cut to 60p from 63p.
Jones described the second quarter sales progression as “surprisingly weak” and said that as well as sales growth slowing dramatically in this period there are also “worrying indications of pressure on Chilled margins.”
Panmure today trimmed its full-year pretax profit estimate to £36.0 million from £37.0 million, bringing the EPS forecast down to 5.87p from 6.03p. The broker also said that consensus expectations of 15% pretax profit growth in 2011 looks increasingly optimistic and it believes that the only attraction in the shares at the moment is the 6.3% dividend yield.
At FinnCap, the tone was a tad more upbeat. Though the broker conceded that the first-half Frozen outturn was “very poor” and the second quarter like-for-like sales outturn appears “somewhat disappointing,” it highlighted that the tone of the update is that management profit expectations have been attained in the first half and also noted that the net debt reduction of around £24 million since September 2008 is a positive.
“The main merit of Northern Foods remains the yield which is 6.3% on the expected maintained 4.5p dividend,” FinnCap analyst Charles Pick said. Though the shares may wobble on these like-for-likes, “there looks to be no cause to panic,” Pick added. “Stefan Barden, the CEO, is a very KPI-driven man who focuses on the bottom line and is always quite prepared to relinquish business if returns are deemed inadequate,” he concluded. FinnCap has a 75p price target on the stock.
