We think recent problems at Hilton Food (HFG) have created an opportunity to buy shares in a previous top market performer and quality business at an attractive price.

The global meat and fish packing business supplies retail titans ranging from Tesco (TSCO) and Ahold Delhaize (AD:VIE) to Australia’s Woolworths (WOW:ASX) under long-term contracts.

Shares in the red meat-to-vegetarian meals supplier started to recover last month after being roiled by two profit warnings last year. Reassuringly, the FTSE 250 food producer avoided having to dish out a third warning in its latest update, instead serving up news of positive progress in the rehabilitation of its UK seafood business.

Hilton trades on an undemanding 12.3 times forecast 2023 earnings and offers a prospective dividend yield of 4.1%.

WHAT DOES HILTON FOOD DO?

Guided by CEO Phillip Heffer, Hilton furnishes its retail partners and food service customers around the world with high-quality meat, seafood, vegan and vegetarian foods and meals. It is well placed to cater to burgeoning global demand for affordable protein products.

The £606 million business runs automated and robotised food processing, packing and logistics facilities for major international retailers across Europe, Asia Pacific and North America and through economies of scale, is able to secure significant efficiency savings for customers while also carving out a nourishing margin for itself.

Hilton’s core business of packing red meat for retailers in Europe and Australasia remains solid, even though consumers face cost-of-living pressures. It generates significant amounts of cash which the company is investing in business diversification and geographic expansion.

Growth prospects have been enhanced through the relatively recent acquisition of Fairfax Meadow, a leading UK foodservice sector meat supplier, as well as smoked salmon business Foppen, a deal which took Hilton into the US for the first time.

The buy-out of the remaining 50% of vegan and vegetarian products maker Dalco last year should not be forgotten either. Always looking to the future, Hilton Food has invested in Cellular Agriculture, a market leader in cultured meat, at a time when interest in a category with environmental benefits is gaining traction.

MEATY POTENTIAL

Admittedly, Huntingdon-headquartered Hilton must build investor confidence after the most challenging year since its 2007 IPO, but its year-end update on 12 January represented a good start.

Hilton assured the market full year 2022 results would meet previously downgraded estimates. Management highlighted continued progress for the UK and Ireland operations, with Christmas 2022 trading said to have been strong and the benefits of Hilton’s ongoing automation programme in the UK are expected to come through this year.

Crucially, There was also news of progress in recovering input costs, notably in the UK seafood business, while Hilton also flagged strong top line growth from its three facilities in Australia.

The company recently announced its entry into South-east Asia through a strategic collaboration with Country Foods, Singapore’s leading meat importer and distributor, a deal marking another step forward in management’s plan to diversify the business across Asia and internationally.

While this partnership starts as a modest export agreement with Hilton supplying seafood and sous vide from the UK and red meat from Australia, it will enable the company to build a track record
in Asia and could lead to a more material opportunity with Country Foods over time.

WHY ANALYSTS ARE BULLISH

For the year to December 2022, Shore Capital forecasts a drop in underlying pre-tax profit from £67.2 million to £54.5 million, ahead of a recovery to £67.5 million in 2023 and £80 million in 2024.

The broker recently described Hilton Food as ‘a world-class operator that was caught up in a perfect storm of sharply rising costs and retailer/consumer headwinds’ in 2022.

The soothing year-end statement has given the broker ‘increased confidence’ that Hilton’s travails were short-term and temporary in nature and that the business remains well placed to deliver sustained, high-quality growth over the short, medium and long term.

Risks identified by Berenberg include customer concentration and the fact many of Hilton’s products are ‘value-added’. This means the company could come under pressure during an economic downturn if customers were to switch to lower priced, more basic alternatives.

These risks were brought home to investors in the form of a weak earnings update from US rival Tyson Foods (TSN:NYSE) on 6 February. We note that Hilton Food’s share price did not fall on this news, which suggests the market isn’t worried about another profit warning from the UK business. However, investors should still treat Hilton Food as a higher risk investment until it has worked through its problems.

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