Recovery in sugar business sweetens Real Good Food Company stock

by IAN LYALL - 21/07/2011

"When Proactive Investors last spoke to Pieter Totté, the chairman of the Real Good Food Company, the share price was languishing at around 22 pence. "

Six months on and the stock is changing hands at just shy of 70 pence as Totté and his team have ushered the group through what was a problematic transition for the sugar business.

Trading on a forward multiple of 10.9 times earnings (the sector trades at 10.4 times), it would appear that RGFC’s current valuation is up with events.

Tastes good: The price of sugar has rebounded sharply

But first impressions can be deceptive. Totté has set his team a three-year growth plan that could utterly transform the company.

Via a series of initiatives they aim to double turnover to £500million, which would see EBITDA rise to around £30million.

The chairman has always said that RGFC would be a capital growth story rather than an income play, but even this may be changing.

'There is a feeling that a dividend policy is key on AIM. So we have agreed and we are considering a dividend,' he reveals.

The last set of results marked the absolute nadir for the Napier-Brown sugar business.

The current year should reflect a sharp rebound in the price of sugar with NB’s turnover expected to grow strongly, bumping up RGFC’s turnover to around £250million.

REAL GOOD FOOD CO - AT A GLANCE

AIM code RGD
Valuation: £43million
Current share price: 66.25p
Year high: 77.5p
Year low: 19p

'I don’t think the market is doing the correct calculation. Although the tonnage has not gone up the market prices have,' Totté says.

However management isn’t simply resting on its laurels and is looking to gain some leverage from its Whitworth retail brand.

It is branching out into speciality sugars with re-sealable foil packs that will be displayed in the bakery aisle and which will command premium prices.

The plan is to double NB’s sales to around £300million and bump the EBITDA up to 6 per cent of turnover from 4 per cent currently.

The real surprise of the results published in March was the Renshaw baking ingredients business, where operating profits grew to £4.6million from £2.5million, picking up the slack left by the loss-making sugar business.

Renshaw is making a concerted effort to capitalise on its recent export success and is revamping and re-launching its range to cash in on the growing appetite for home cooking.

The plan is to increase Renshaw’s sales by 50 per cent to around £75million and consistently attain a 10 per cent EBITDA margin.

At the same time the turnaround at Haydens, the bakery business that makes cakes for Waitrose and Marks & Spencer, continues.

The company’s new picking centre in Wiltshire is part of a wider modernisation strategy which it is hoped will boost margins and expand the division.

There are also ambitious plans for the Garrett, the ingredients operation, which whilst small is a high-margin operation.

And according to Totté there is also the potential to double sales in this business within the next three years.

'We are constantly working on housekeeping,' he adds, revealing there are potential major savings to be made by streamlining the logistics operation.

'And everyone is working on the new three year plan. We have a very good team that is pushing things along.'

The current valuation, meanwhile, overlooks the value of the sugar business to a would-be buyer wanting to take a strategic position in UK sugar market.

'In fact all our businesses are niche businesses with strong strategic value and a lot of people miss that,' says Totté.

There are already very clear signs that resurgent Napier Brown is helping lift the company’s financial performance.

Totté told investors at the company’s annual meeting that earnings would 'materially exceed market forecasts'.

This prompted Shore Capital, the company’s broker, to raise its pre-tax profit prediction to £6.6million from £5.8million. But you wonder whether this might not be a little conservative when you consider what Totté has set in train.

'The group’s underlying momentum remains strong so we remain positive on its future prospects,' says Shore’s Phil Carroll.

More Details: http://www.thisismoney.co.uk/money/markets/article-2016067/SMALL-CAPS-FOCUS-Sugar-business-recovers-Real-Good-Food-Company.html?ito=feeds-newsxml