Business Irish

Sunday 25 February 2018

Greencore agrees schedule to end Starbucks deal as shares dip again

Patrick Coveney, CEO of Greencore
Patrick Coveney, CEO of Greencore

Gretchen Friemann

Greencore, the Dublin-based convenience food giant, has agreed a timetable to phase out its contract with US coffee behemoth Starbucks, the loss of which saw the company's share price whipsaw last week.

Sources told the Irish Independent that the London-listed company was aware of the impending loss of the Starbucks contract for "a number of months" but viewed its impact on profitability as minimal.

The termination of the contract at Greencore's Jacksonville, Florida plant helped send the stock down by close to 14pc in less than two days. Last week's rout in the share price compelled management to publicise what it described as "some level of churn in the legacy retail part of the US business".

While the statement halted the stock's slide, traders said investors remain anxious about how management handled the information flow on the Starbucks contract, under which Greencore provided frozen food to the chain's network of Eastern seaboard coffee stores.

One source said the group should have disclosed the loss of business at the third quarter results update at the end of July.

However it is understood that management had believed the contract's exit was not sufficiently material to disclose to the market.

Yesterday New York-based investment bank Jefferies mounted a robust defence of the company's prospects, arguing in a note to clients, titled '6 reasons to buy [Greencore] this morning' that the share sell-off was overdone.

Analysts Martin Deboo and James Letten apportioned some of the blame to management, arguing the stock's slump reflected "poor expectations management" rather than "performance and valuation fundamentals". However they insisted the investment case in Greencore remains sound and estimated the frozen contract in the US, which is now being phased out, was worth close to "$75m (£60m) in sales". Jefferies remains cautious about Greencore's US earnings in FY18 - the firm has lowered its US EBIT expectations by £5m and group forecasts by close to 4pc - but Mr Deboo and Mr Letten pointed out the "sell-off has been twice that, from an already low base".

While the volatility has in eased, the shares continued on a downward drift yesterday, closing 1.25pc lower to £1.974. In its statement last week Greencore stressed "the integration of our US business is on track and we continue to be encouraged by the pipeline of commercial opportunities being explored with existing and new customers". In an effort to buttress this reassurance, CEO Patrick Coveney and chairman Gary Kennedy upped their stakes in the company.

But as the stock resumed trading after the UK's public holiday yesterday, the pessimism that held sway last week appeared to show little sign of abating.

Speaking to the Irish Independent earlier this week, chief investment officer at KBI Global Investors, Noel O'Halloran, claimed Greencore's management were "reactive" over the termination of the Starbucks contract and said the market response signalled a "credibility issue" for management.

On Monday it emerged Cantor Fitzgerald had cut its investment rating on Greencore due to concerns over its US arm.

But investors sources said the division will drive earnings and argue the stock now represents a buying opportunity. Jefferies echoed that view in its note, which emphasised Peacock Foods, acquired in November for $747.5m, was snapped up "on a sensible valuation (10.4 x ebitda) and with a relatively easy-to-achieve synergy case". The analysts stressed that "cash is on its way" as the fruits of buying sprees materialise. "With capex set to fall below £100m in FY18, we are looking for free cash flow (FCF) of £40m in FY18, rising to £64m in FY19, equivalent to a yield of 4.9pc rising to 6.8pc."

Irish Independent

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