Jefferies upgraded food producer Cranswick on Wednesday to ‘buy’ from ‘hold’ as it said the pullback below 3,000p offers a compelling entry point.
The bank said a fresh approach to forecasting, one based on return on new invested capital, suggests that Cranswick is capable of compounding profits by 6% per annum over the next five years, 150 basis points ahead of consensus, with an upside case of double-digit growth, in line with what has been delivered in the most recent five years.
“With the shares down 25% on the 12-month higher and the EV:EBITDA multiple having close to halved, we upgrade,” it said.
Jefferies said its main concern when it initiated coverage on the stock two years ago was that the maturity of Cranswick’s core market of UK retail pork limited future growth opportunity.
“But that would be to ignore Cranswick ability to grow inorganically by deploying new capital successfully in the direction continuous yield improvement in core categories (e.g., Deboflex), capacity expansion and de-bottlenecking in the same (e.g., Ballymena acquisition) and ‘greenfield’ category entry (e.g., Eye),” it said.
“We accordingly shift our forecasting approach away from one based on sales & margin momentum to one based marginal return on new capital, reflecting on our analysis CWK’s impressive (and undimmed) track record of generating mid-teens pre-tax returns on the above.”
Jefferies cut its price target on the shares to 3,650p from 3,810p.
At 1000 BST, the shares were up 4.2% at 3,042p.
