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Greencore Group plc (GNC:ID or GNC:LN)

  • Mkt Price:  EUR 0.645
  • Mkt Cap:  EUR 248.2 mio
  • P/E:  4.0   (well, sorta…based on 2011 Cont Adj EPS)
  • P/S:  0.19
  • Div Yield:  8.4%      

I’ve been champing at the bit for the latest Greencore results, which just came out today. They’re always enjoyable to review, and a real boost to my day. Gee, I wish I could live in Greencore’s happy world forever. It’s amazing how wonderful a picture they can paint in the pages of their annual report. Um, I mean the front pages of the report. Perhaps errant husbands or wives should commission and present their spouses with an annual report each year? With a Nov year-end, of course, so it’s always the best present under the Xmas tree. Jesus, we’d never hear of another divorce ever..!

So, Greencore certainly looks cheap, but let’s take a closer look: OK, ignore the first section of the annual report, that will save some time. Why? Because the management commentary seems to bear very little relationship to reality! I’m not even going to provide examples, they’re far too numerous. Just take a look yourself, compare one year to another, and also reconcile to their respective financials. OK, just one tiny example: I searched in vain for the FY Dividend…and figured out the final dividend was almost halved. Seriously, this is why they wouldn’t highlight it?! We also see a switch from EUR to GBP accounts this year. This is classic, always good for muddying comparisons and trends. Especially when you maintain a EUR share price! How about a year-end change next year, just to change it up again?

Right, the simplest way to handle this is to convert all previous year figures at the current 0.8562 EUR/GBP FX rate. Eventually, after laborious analysis, I realize that NONE of the figures match up in successive annual reports. Every single year, and/or prior years, there are continuing, discontinuing and restatement adjustments. And, of course, there are the inevitable (and not so) exceptional items every year also. In the end, I started again, working only with current year figures taken from each separate annual report. I also focused primarily on the Cashflow report. This is what the figures look like:


First, a little explanation: Ignore the Uniq figures, I’ll return to them. I struggled to define Operating Free Cash Flow, and in the end I’ve included Cash from Operations, Exceptional Items, Discontinued Activities Cashflow & Capex, Associate Dividends, PPE (Capex), Investment Property and Intangibles. Net Interest is also taken from the Cashflow report. When you’re dealing with a distressed business, I believe this is the only realistic approach. Criticize bankers all you want, but some still retain that handy little trick: Ignore everything management says, just look at what they do and what they actually report. Oh, and always follow the Cash. Focus on anything else and you’re in danger of falling for management’s rosy picture.

To be fair, I included an exceptional gain in 2008, so this probably washes out much of the other exceptional losses. You have to include Discontinued Cashflows. Otherwise, you’ll suffer the usual management ploy – hey, let’s just single out and exclude the impact of a poorly performing business each year. I include Investment Property simply because I don’t know what it represents? If that’s what it is, why the hell’s such an indebted company buying it?! Finally, I think it’s irrelevant whether Capex is maintenance or investment – Cash is out the door regardless, and any future incremental return is pretty uncertain. And I don’t think Capex will improve. First, management probably doesn’t have the self-control, but also because they’ll probably always believe that just that little bit more of Capex will cut costs and boost returns. Warren Buffett still laments this kind of spending in the early days after he took over Berkshire Hathaway (BRK/B:US).

So, we have an average Operating Free Cash Flow Margin of 4.3%, or a current GBP 34.75 mio based on GBP 804.2 mio of Revenues. Compare this with a Net Interest bill of GBP 19.832 mio…

I’m starting to feel a little faint…let’s take a breather, and consider management for a moment instead. Well, I recently damned Total Produce (TOT:ID) management with some faint praise – noting that at least Greencore made them look good..! This isn’t a new story. Jump back to the early 90s, and Chris Comerford’s CEO tenure ended in disgrace. This was accompanied by plenty of self-dealing, corruption, political shenanigans and even a Stock Exchange inquiry or two. Directors along the way included Bernie Cahill and Jack Stakelum, both close chums of the late (and notorious) Charles J Haughey (or Sweetie, as Terry Keane called him). Then we have the dead hand of Ned Sullivan, the current Chairman, who is/was also on the boards of such successes as Anglo Irish Bank, McInerney Properties and Eircom… And yes, he returned the Anglo favour, with Sean Fitzpatrick appointed to the Greencore board for a number of years.

We also had David Dilger, who came from Food Industries (which Greencore bought, and which had its fair share of scandal too), and was formerly with Woodchester Investments. He is currently Chairman of Aer Rianta, Ryanair’s (RYA:ID) favourite company to hate. Dilger was appointed CEO in 1995, and managed to last until 2008, when he handed over the reins to Patrick Coveney. Patrick had arrived at Greencore as the great white hope from McKinsey in 2005. Unfortunately, during his 3 year tenure as CFO, he seems to have afflicted by the Dilger bug and has presided over GNC’s continuing decline since then.

I won’t detail any particular business cock-ups, except perhaps the Scottish mineral water caper. How do you discover a EUR 21 mio fraud in a EUR 40 mio turnover business, shortly after acquiring it?! And let’s not talk about the hundreds of millions they thought they were going to make out of their idle property. It’s simpler to just compare some headline figures (all in EUR) from the newest and oldest annual reports on GNC’s website – it tells the whole story:

                                                           2002                              2011

Revenues                                1,585.6 mio                 939.3 mio

Operating Profit                       102.2 mio                    60.1 mio

EPS                                         29.4 cents                  16.2 cents

Dividend                                 12.63 cents                 5.4 cents

What about management’s strategy? Well, the official version was something like ‘we will divest low margin/non-core businesses, to fund reinvestment in our higher margin chilled/fresh convenience foods business’. The alternative version is ‘we’re going to sell off most of our businesses, use the cash to pay for constant restructuring and to buy other businesses, and yes we think selling own label snacks, desserts and meals to supermarkets and petrol stations is a wonderful business!’. Jesus, who do you think does better out of their annual price negotiations: Greencore or Tesco (TSCO:LN)? This strategy has now reached its logical conclusion: Convenience foods comprise over 90% of the business, they won the 2011 Own Label Supplier of the Year award, and they cap the year with the purchase of Uniq. And the figures above sum it all up…

Greencore now boast of being the largest sandwich maker in the UK & Ireland…but c’mon, when did you last care who made your sandwich?! Unless it’s O’Briens, of course – try my favourite (creation?): Sausage, egg (mayonnaise), onion, lettuce and Ballymaloe relish. Btw If you’re in the US, have a little fun and order a ham (or sausage) and egg sandwich – it will cause great consternation..!

We’ve talked about management value (?), now let’s talk about cost. Above, we assumed an average Operating FCF of GBP 34.8 mio – this is after total Director Compensation of GBP 3.8 mio. Wow, that’s about a 10% management fee! It’s like a really bad hedge fund. I haven’t even bothered to calculate the impact of share and option awards. But perhaps, like hedge fund managers, the directors’ net worth is invested alongside other shareholders so they’re properly incentivized? Em, no, the board appears to only own about GBP 738 K of stockamounting to just 19% of their annual compensation! I wonder how much of that stock was paid for in cold hard cash?! And now GNC is that much bigger, after the Uniq acquisition, shareholders should understand any accompanying increase in Compensation to come. After all, it’s simply the decent/dignified thing to do..!

OK, that’s enough for one day, I’ll finally get to the Uniq takeover next time ‘round.