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Sept 2021                                                                                      

Share price: 132p

Dividend yield: Cancelled until further notice due to the Covid crisis

P/E: 40 (based on prospective earnings per share of 3.3p for 2021, falling to 14 based on forecast earnings per share of 9.7p for 2022 assuming a return to normal operating conditions post-Covid)

Greencore's CEO, Patrick Coveney, was under pressure in early 2020, on the announcement of yet another unimpressive trading update in January, followed by his sale of 700,000 shares in February. The usual stuff was trotted out..."a challenging trading environment" (is there ever any other type?)..."costs related to a strategic reset" (achieving earnings forecasts by classifying some costs as 'exceptional' perhaps?) etc.   A whopping 31.6% of the shareholders voted against the very generous directors' remuneration contracts that Greencore continues to operate, despite the on-going destruction of shareholder value.

And then in March 2020, came the Covid crisis. As an already struggling company, it now experiences a collapse in revenues, due to the related lock-down measures. But the veteran sailor at the helm knew that these Covid crosswinds would distract from his own poor performance. Losses at Greencore could now be attributed to the Covid crisis. In addition, the UK government would provide 'furlough' supports, and more importantly put bankers under pressure to support the many beleaguered companies adversely affected in this new environment, including Greencore.

In any case, Greencore looked somewhat rudderless pre-Covid. In 2018, it had a profits warning due to problems in the US business. Later that year, it sold the entire US business and used to proceeds to pay off some of the bank borrowings, and distributed the remainder to shareholders, indirectly, by means of a share buyback and cancellation.

Although Patrick Coveney spoke of refocusing on the UK business, Greencore looked like a company that had little in the way of growth, much less a coherent strategy for the future.

Having raised over £800 million on selling the US business in 2018, Greencore used most of the proceeds buying back 261 million shares at £1.95 each and cancelling them, spending £509 million in the process. The remaining £300 million was used to reduce its high debt level.

Fast forward to November 2020 and Greencore is forced to re-issue 80 million shares at £1.12, raising £90 million in a placing, to shore up the balance sheet.

And what did it do with the ninety million quid? The entire amount was used to pay down the debt of the company.

Those nervous bankers are certainly defending their own interests. In addition, Greencore will be paying significantly higher interest and charges, for the privilege of obtaining easier terms for the banking covenants (interest cover and the maximum permissible multiple of EBITDA to debt).

The main problem that Greencore has, is that its main business of supplying sandwiches to supermarkets (for own label sales), is just not a very profitable business. The net profit margin on sales was only around 5%, pre-Covid. It requires significant capital investment, and then, to cap it all, the supermarkets usually extract 90 days credit and this has a very negative effect on cash flow. Throw in an overall deficit on the pension fund of £72 million (the surplus on the Irish fund is well exceeded by the huge deficit on the UK fund), equating to around 14p per share, and it is difficult to see anything attractive about the shares.

If interest rates rise, or if the Covid crisis continues, then another heavily dilutive share issue will follow to fill the hole in the balance sheet. Fortunately, none of these scenarios appear likely at the current time. However, the price earnings ratio will only fall to around 13, if earnings per share recovers to pre-Covid levels of around 10p per share, including some new contract wins in the UK. That does not look like a bargain price to me, given the many challenges the company faces.

The share buyback and cancellation in 2018/2019 at £1.95 per share, was followed by a rally up to around the £2.65 level. This brought the gearing level up to 61% (long term debt including leases as a percentage of total equity plus the former) after the £509 million buyback.

The gearing level fell to 41% after the placing of £90 million worth of shares in 2020. Perhaps one could argue that in the event of a full recovery in earnings post the Covid crisis, Greencore would have the scope to do a further buyback. Maybe, but this time around it would have to be significantly smaller buyback at £300 million, if the previous gearing level of 61% is not to be exceeded.

And seeing that the shares could not hold the gains made following the last buyback, then they are unlikely to do so again in the event of a smaller buyback at some time in the future.

Patrick Coveney sold another 950,000 shares earlier this month at around £1.42 each. I wonder what he is doing with all the money.... when added to his highly generous remuneration? Maybe he plans to buy a super-yacht....I understand that the highly prized sunseekers are retailing at a couple million dollars each...

However, it looks like the long suffering shareholders won't be trading up from their rubber dingies for the foreseeable future. 

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