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Produce Share Discussion Threads
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|Excellent article thanks jon123.|
|stole this from another board
By Edmond Jackson | Tue, 3rd January 2017 - 10:20
Stockwatch: Buy this share on the dips Last December's £633 million takeover of Fyffes by Japan's Sumitomo Corporation was frustrating in that I had drawn attention to it some years before, arguing that fruit and bananas in particular were a long-term growth market, even if Fyffes' stock performance was quite irregular and off-radar for most investors.
I then let it drop off the map, like most, but value was eventually affirmed by Sumitomo. So I wonder the extent of parallel with AIM-listed Produce Investments (PIL), a British potatoes and daffodils supplier, considering how the Jerry Zucker Revocable Trust (named after a late Israeli-American entrepreneur) held 11.8% in Fyffes, and last 7 December raised its stake in Produce Investments from 6.5 million shares to 6.9 million or 25.7% of the equity.
Such extent of ownership of a £47 million company means this trust is locked in, taking a long-term view until a trade buyer makes a move. Either that or the fund manager has special confidence in Produce Investments, currently priced around 175p at the high end of a two-year range of 120p to 190p, albeit down on the 300-320p range the stock reached in 2013 and 2014.
The volatility is explained mainly by variable cropping and a squeeze on supermarket pricing, but management says it has restructured to cope.
I should also clarify, hedge fund Toscafund did reduce its stake from over 10% to 4.1% last October to November, but at the same time asset manager Ruffer went to over 5%. So Toscafund takes a more sceptical view or believes in a better switch.
Double-digit profit surge
Produce Investments is "vertically-integrated", from growing seeds to processing and supplying major retailers and wholesalers. Key brands include England's largest fresh potato packer Greenvale, potato grower the Jersey Royal Company, anti-sprouting storage group Restrain and Cornish daffodil hand-pickers Rowe Farming.
The group hasn't updated on trading since September, when results for the year to 25 June 2016 showed a 4% rise in revenue to £185.1 million and a 14% improvement in operating profit to £9.2 million, helped by more stable retail market conditions. Pre-tax profit dropped 41% to £3.3 million, however, due to the closure of a packaging site in Kent costing £4.6 million and metal contamination causing a product recall.
The matter has been fully resolved and management has now created a supply chain model "more closely aligned" to current market conditions, which can also offset any fluctuations - the closure of a Kent packing facility has removed surplus capacity, for example.
When the chairman of 10 years retired last October, he said: "The business model is more resilient, more diverse and well placed to handle any pressures that it might encounter."
This coincides with supermarkets introducing fresh food price increases as competition eases from the discounters - as if Aldi and Lidl have borrowed from German government subsidies to expand, long enough.
A forward price/earnings (PE) multiple of around 7 times is in line with the stock's annual average historic PE of recent years, although the rating should improve if management de-risks the business with more consistent results. The prospective dividend yield is nothing special at 4.5%, but forecast earnings cover this an ample three times. Yields in the region of 5% or more tend to be covered below two times, so this is yet another sign the stock is being priced cautiously in case of setbacks.
The table also shows a strong cash flow profile, some years in excess of earnings, which bolsters security of the dividend. Capital expenditure is obviously grabbing a share of this and management is on the outlook for further acquisitions, despite a lowly cash position last June. But the overall profile hints more at upside rather than downside, further supported by a strong net tangible assets per share value and operating margin improvement from 3.9% to 6.3% in the last financial year.
So, while Produce Investments isn't exactly an exciting new business and supermarket suppliers are usually a turn-off for investors, key financial metrics hint at a positive risk/reward profile at around 175p.
Flexibility for M&A
My chief concern is that management want to diversify into more food service providers and possibly venture into other markets through acquisitions; but the cash/debt position doesn't imply much flexibility.
At the last balance sheet date of 25 June 2016, cash had run down from £2.8 million to £0.7 million; admittedly after repaying £7.0 million of longer-term debt during the year. Short-term debt rose from £16.5 million to £18.9 million. This leaves net gearing of 35.4% with intangibles representing 31.5% of net assets and net interest charges clipping 11.9% of interim operating profit in the last financial year.
Fair enough, but the board needs to better clarify its funding facilities in annual results like this, especially when it entertains acquisitions as a key plank of development strategy. As things stand it will benefit from a fresh long-term debt facility. Even the 2016 annual report doesn't clarify the group's funding flexibility under present arrangements.
This is a side-step, but I recall Warren Buffett once disclosing how he'd taken out a low-cost debt facility in an annual report, because its terms were attractive and he wanted to demonstrate flexibility for acquisitions even though nothing attractive was in sight.
Weather chief risk
Management says it has upgraded its IT systems partly to cut the risk of failure - migrating to an external cloud-based provider from in-house servers - and doesn't envisage any major impact from Brexit in the short term, although immigrants represent a significant portion of the workforce - a risk if tougher controls ensue.
Weather is the chief factor management can't control, however, and any investor would need to be convinced that climate change won't mean freak weather upsets at key times for the business. But, as the 25.7% shareholder appears to believe, any drop in share price is an opportunity to accumulate for the long-term prize.
For more information, visit the website.
Produce Investments - financial summary Consensus estimates
year ended 25 June
2012 2013 2014 2015 2016 2017 2018
Turnover (£ million) 154 206 192 178 185
IFRS3 pre-tax profit (£m) 6 7.6 8.6 7.3 3.5
Normalised pre-tax profit (£m) 5.6 7.7 10.2 6.1 10.8 8.6 9.3
Operating margin (%) 4.4 3.7 5.8 3.9 6.3
IFRS3 earnings/share (p) 23.1 26.9 31.7 19.8 11.6
Normalised earnings/share (p) 20.4 27.3 38.1 15.6 36.7 24.3 26.4
Earnings per share growth (%) -0.2 33.7 39.7 -59.1 135 -33.8 8.8
Price/earnings multiple (x) 4.8 7.2 6.6
Annual average historic P/E (x) 7.5 7.4 7.9 7.2 6.8
Cash flow/share (p) 37 15.6 42.4 34.4 32.6
Capex/share (p) 12.5 12.5 29 13.6 14.3
Dividend per share (p) 5.5 3.6 5.9 6.9 7.2 7.6 8.3
Yield (%) 4.1 4.4 4.7
Covered by earnings (x) 4 7.8 7 2.3 5.2 3.2 3.2
Net tangible assets per share (p) 71.5 72.7 117 128 129
Source: Company REFS
PIL 167.25p -7.75 (-4.42%)|
|Suspect the MMs have been playing games.|
|Yep, ticking back up again...|
|Obviously they are not a FFY as it is a different business but I think they can do a similar thing here.
Now for the 'sitting and waiting'.|
greg the grinch
|Yes mine too, long term hold for me so not at all concerned.|
|I reckon there is a long term seller out there (Tosca?), if you look at the chart they wait for 175p-ish and then sell into that rise.
I knew this when I bought in. My thoughts are that the sells will be absorbed over the next few weeks/months so expect a 'wiggle' and then up we go.
I reckon buyers of this share are also investors and not the quick money brigade so hopefully not too much profit taking.
My only red share.... :)|
greg the grinch
|Profit takers this morning...|
|Hi BB, thanks for the PIL tip.|
greg the grinch
|Finishing the year on a high it seems.|
|Thanks for the Investors Champion link GHF. Always a pleasure to be of service to the investment community ;))|
|Forgot to post on this thread that I've been adding here.
Tweeted about it though a few weeks back in response to battlebus flagging the investment opportunity ;-)
PIL (Produce Invetments PLC) owners of @JerseyRoyalCo - Agree, I've also been buying. PER only 6 & Div yield 4.7%. @Stockopedia Rank 98 !!!
Investors Champion also have it on their radar.
Despite staging a recovery in the last quarter of the year, the share price of Produce Investments (AIM: PIL), a leading operator in the fresh potato and daffodil sector, also remains well off historic highs. The Group is a vertically integrated potato and daffodil company encompassing one of the UK’s leading potato businesses in Greenvale AP Ltd as well as the Jersey Royal Company, the principal supplier of Jersey Royals, and Rowe Farming one of the UK’s leading producers of outdoor, handpicked daffodils. Customers include leading grocery retailers and food service companies including Tesco, Sainsbury, Asda, Waitrose and Marks & Spencer.
Price wars between the leading retailers have triggered significant pricing pressure throughout the entire supply chain, resulting in value and volume decline over the year which coincided with an exceptional growing season in 2014. The Group also had to manage the fallout from a metal contamination issue at one of the businesses, which saw a product recall.
Confidence in the future was illustrated by an increase in the final dividend to 4.775p resulting in a total dividend of 7.165p up approx. 5% on the prior year.
Forecasts for the year ending June 2017 are for a full year dividend of 7.625p which equates to a yield of 4.7% at the current share price (160p). It may not be the most exciting business on AIM, and with business reliant on the large retail groups it’s a tough operating environment, but the shares could still offer decent value at current levels.
|All looking very good here. Something is brewing I think. Still relatively cheap and a very nice Rating on Stockopedia now.
It's also about 2 years from the low point. Time for a strong recovery?|
|Yep this is my top holding and has been from AVS and FFY were taken out and like them it's just a case of patience. Dyor etc.|
|Yes, my thoughts are that we will soon be sitting on a good profit but the real money will be made if the expansion and diversification strategy goes to plan and that will take a few years. Suits me.|
greg the grinch
|Sitting and waiting Greg. Why sell? Nice dividend too.|
|Are you guys going to do some 'sitting and waiting' and hope for a FFY situation or stick to a predetermined selling price?|
greg the grinch
|Yes good to see, slow and steady suits me fine. Last of the overhang must have been placed. Worth £2 today imv.|
|Share price slowly creeping up here.|
|Whitman Howard re-iterated at 210, fwiw|
|I was hoping to see M&A the other way with us buying but hey for £3 I'd be tempted.|
|Yes, this is looking a bit of a bid target in my view, particularly given some of the founders exiting.|