Hilton Food (LON:HFG) is a “specialist” retail meat-packing business with significant operations across the UK, Netherlands, Denmark, Ireland, Sweden, and Central Europe. The reason why this seemingly boring company interests me is that it makes amazing returns on net operating assets, especially considering it is supposedly in a ‘commodity’ industry. It is roughly in the price range for decent returns but I think the sheer fact that it makes such extraordinary returns makes it an interesting situation by itself.
It is somewhat irrelevant for shareholder returns but the company has achieved an average of 49% on net operating assets since it IPO’ed five years ago. I found this very surprising, for a commodity business there is a ton of money being made here. Unsurprisingly, these returns are achieved with slim margins, LFY EBITDA margin was around 435bps, and very fast turns. The company does appear to have some hidden leverage as it leases some property (which means some long-term assets are missing and turns are overstated) however, the basic picture here is of a surprisingly good business which has created a lot of cash for investors.
The downside of Hilton’s business is that when commodity prices rise, as they have done, a company like Hilton doesn’t have many options. Indeed, as Hilton has only two customers, Tesco and Ahold, making up about 90% of LFY sales it is particularly vulnerable to these trends.
As Hilton provides some good disclosure on volume we can see this trends clearly. The figures are copied below but the main point to highlight is that margins have been under sustained pressure. Hilton has lost 10bps of margin since 2007 costing around £9.8m, in LFY11 terms. It clearly hasn’t been able to pass all the raw material cost increases on but it has passed on about 94% of the increases. We can also tell that over the past five years most revenue growth has come from volume rather than price.Investors should be concerned about this. Even if commodity prices started falling the company may not have the competitive position to secure any gains.
|
|
2011 |
2010 |
2009 |
2008 |
2007 |
CAGR |
|
Revenue(th) |
981,345 |
864,223 |
826,091 |
729,497 |
… |
