Can Greencore’s new boss Dalton Philips put fresh filling back in limp sandwich maker?

Greencore’s outgoing chairman of almost a decade, Gary Kennedy, has seen the former Irish sugar company-turned UK’s biggest sandwich maker through the likes of an embarrassing retreat from the US market four years ago and the ravages of the Covid-19 pandemic. But he was in little doubt on a call with analysts in July that the group’s financial year to the end of September “will be remembered as the most challenging in our history”.

It saw the group, established in 1991 through the privatisation of Irish Sugar, battle against virus spikes last winter, supply-chain issues, waves of inflation, difficulties getting staff and leadership changes.

A sales hit from UK rail strikes in recent months and an unexpected bank holiday on the funeral of Queen Elizabeth only added to Greencore’s woes, prompting it to issue a trading statement on Tuesday warning that its full-year operating profit would come in at the lower end of its previous forecast of £72 million (€82.2 million) to £77 million.

When Kennedy hands over the spatula to Frenchman Leslie Van de Walle in January, things are unlikely to be much better.

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Greencore’s current financial year is set to be “an epically tough” one, as it deals with both ongoing supply and demand problems, Martin Deboo, an equity analyst with investment bank Jefferies, wrote in a report on the eve of the trading update.

The group’s new chief executive of less than three weeks, Dalton Philips, may have been relieved to have found a parachute out of the top job at DAA after the chaotic scenes at Dublin Airport during the summer, but he has “some head-scratching to do” to come up with a plan on how to find “the next leg of growth” for Greencore, Deboo said in the report this week.

Greencore drove the “industrialisation of the sandwich” in the UK over the past two decades, according to Deboo. It did so by taking advantage of a mushrooming of convenience stores, plenty of cheap migrant labour before Brexit and the strong relationships managed by Patrick Coveney, who led the group for 14 years, with the big supermarket chains.

“All those themes are now played out,” said Deboo.

Shares in Greencore have fallen 75 per cent since late 2019 and are now changing hands at prices last seen a decade ago.

The company’s £530 million enterprise value, comprising its market capitalisation and debt, is currently about four times what analysts are pricing in for its 2023 earnings before interest, tax, depreciation and amortisation. That’s below the multiple on which it was trading at the height of the financial crisis.

Greencore said revenues jumped 30 per cent to £1.7 billion in the year through September, driven by 35 per cent growth its key food-to-go business in sandwiches, salads and sushi as people returned to the workplace and the company pushed through price increases in an effort to recover its own rising costs. Other convenience food categories, including chilled Thai curries and pasta dishes, soups, sauces and quiches, grew by 19 per cent.

But this is a business that is running on an operating profit margin of less than 5 per cent — compared to more than 7 per cent in the years before the pandemic. While 60 per cent of the Greencore’s contracts allow for it to automatically pass through direct raw material increases, its ability to recover labour and energy inflation is more limited, according to analysts.

Still, the company said this week that it has “substantially recovered” the inflation it experienced over the past 12 months. The big question is whether Greencore can continue to do so, according to Doriana Russo, an analyst with HSBC.

The signal Greencore sent to big customers in the trading statement this week — saying it is “making decisions on whether to bid for or renew contracts based on their economics” — suggests discipline.

Philips, for now, has to focus on immediate headwinds. The company said this week that it doesn’t currently see the weakening UK economy having an impact on consumer demand. “However, we remain watchful and cautious about the potential impact of cost-of-living factors through the year ahead,” it said. It was enough to get analysts to take out the red pens to their earnings estimates for this year.

But at some stage, the new chief executive will be expected to come up with a new grand plan. Roland French, an analyst with Davy, seems some obvious strategic issues.

“The quality of Greencore’s food-to-go model has never concerned us. Category scale — particularly sandwiches — makes Greencore an important partner for retail customers. The high footfall, high margin store perimeter remains important square footage for retailers,” said French.

However, he said that the company has been too slow to expand its food-to-go range. French’s main concern is the other convenience foods, which are in a highly competitive part of the market where Greencore has struggled to make enough money to cover the cost of capital invested.

“The new CEO inherits a strategy that heretofore prioritised capital-for-customers over economic value (£450 million of capital expenditure since 2016 plays a current market capitalisation of £350 million),” French said.

If the stock is to have any chance of living off depressed valuation levels, investors will need to see “better capital discipline and cash conversion, and clarity from the new team on future strategy,” he said.

In ordinary times, Greencore would be attracting a “private equity solution” — analyst speak for a takeover bid — trading at these levels, French said.

But these are no ordinary times.