ii view: Hilton Food stays on track despite rising costs

A diversified food product offering and a supplier to Tesco. We assess prospects. 

Trading update from 3 January to 23 May

ii round-up:

Food packaging company Hilton Food Group (LSE:HFG) today reported early year trading in line with management’s own expectations, although it did point to a challenging outlook. 

The supplier of meats and other foods to retailers including Tesco (LSE:TSCO) detailed sales ahead of last year, primarily reflecting increases in raw materials as well as the execution of its own growth strategy. 

Hilton Food shares were little changed in  UK trading having gained by almost 7% year-to-date coming into this latest update. Shares for Premier Foods (LSE:PFD) are up by a similar amount during 2022, while food firm and Primark owner Associated British Foods (LSE:ABF) has fallen by close to a fifth. The FTSE 250 index is down around 14% year-to-date. 

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Hilton, which supplies over 500 million meals to UK consumers every year, operates across more than 20 food processing, packing and logistics facilities in markets across Europe, Australasia, and North America.

The FTSE 250 constituent company completed its purchase of speciality smoked salmon producer Foppen during the period. That added to its previous expansion into other areas away from meat and including plant-based foods, diversification which was helping to counter some decline in volumes purchased during the early year given higher prices. 

Accompanying management outlook comments detailed its expectation to achieve further progress during the year ahead, despite the potential for lower volumes given higher prices coming from increased raw material costs. 

Hilton continues to work with customers and suppliers to help mitigate the impact of higher input pricing. Previous acquisitions including Fairfax Meadow, the UK’s biggest butcher to the hospitality industry, and Dalco, a Dutch vegetarian and vegan company, also help underpin medium-term prospects. 

First-half results are scheduled for 15 September

ii view:

Established in the UK to package meat, Hilton has subsequently grown by establishing plants overseas, entering joint ventures and expanding its product offering. Each of its packing plants are operated on a dedicated basis for its customers. During it last financial year, Australia and New Zealand generated its biggest slug of revenues at around 40%, followed by the UK at just over a third, with the balance spread cross Ireland and Europe.

For investors, rising raw material costs feeding into higher product prices and potentially lower full-year volumes cannot be ignored. A highly uncertain economic outlook, consumers suffering a cost-of-living crisis and exposure to currency movements also all remain noteworthy. 

More favourably, food arguably provides some defensiveness as consumers have to eat no matter what the economic backdrop. Diversity of both its product offering and geographical exposure is also worth remembering, while a historic and estimated future dividend yield of around 2.4% is not totally derisory in an environment of low if rising interest rates. In all, and with the consensus analyst estimate of fair value stood at over £14, longer-term investors may wish to stick with this high-quality company. 

Positives: 

• Geographical diversity
• Seeking further growth opportunities

Negatives:

• Rising costs
• Uncertain economic outlook

The average rating of stock market analysts:

Strong buy