As part of the deal – which runs until February 2019 – Hilton will invest an estimated £20M in the plant, according to City analyst Panmure Gordon. The investment would focus on the construction of a fourth production unit at Huntingdon and building work was already underway.
Graham Jones, Panmure Gordon executive director, predicted the partnership could boost volumes by 40% in the first full year, 2015, leading to £140M of additional sales. It estimated start-up costs for the UK facility of about £0.4M.
‘Hilton’s relationship with Tesco’
While the partnership was slated to run for six years, until February 2019, Jones predicted, given “the depth and longevity of Hilton’s relationship with Tesco,” no particular significance could be attached to that date.
Panmure Gordon described Hilton’s balance sheet as “very strong”. It estimated additional UK sales of £65M next year, but the extra earnings would be offset by a reduction in growth in the rest of Western Europe, it added.
To reflect the investment plan, the analyst changed its end-of-year net cash forecast of £1.4M to net debt of £3.9M. Its profit before tax forecast was cut from £27.9M to £27.7M and its earnings per share forecast fell by 0.8% from 28.2p to 28.0p.
Also, the analyst changed its net cash forecast of £8.6m for next year, to a net debt of £16.6M. “However, Hilton’s cash flow then strengthens significantly and we forecast net cash of £4.1M in 2015 and £24.4M in 2016,” said Jones.
It raised its earnings per share forecast for 2015 by 12.6% and its 2016 forecast by 14.8%.
“We believe this is a very significant development for Hilton, and in our view is a further endorsement of the strength of Hilton’s offering to leading retailers.” The analyst repeated its ‘buy’ advice on the firm’s stock.
Hilton confirmed: “The agreement means a substantial increase in volumes supplied to Tesco from the Huntingdon facility, the full benefit of which will be obtained in 2015 and subsequent years.”
‘Exciting development’
Robert Watson, Hilton’s ceo, said: “This is an exciting development for Hilton. We are proud to have formed a strong, long-lasting partnership with Tesco and we will continue to work closely with them to supply products of the highest quality to their customers.”
In the same statement, Hilton predicted slightly lower growth for its western Europe business – excluding the UK – next year, reflecting “macro-economic and consumer weakness” in some countries. But that would be offset by the positive impact of the new deal with Tesco, it said. Both the Irish and Swedish economies remained weak.
Hilton also revealed plans to invest in its Swedish manufacturing operation. Total investment in the UK and Sweden would amount to about £30M.
Meanwhile, Tesco has denied criticism from retail analyst Cantor Fitzgerald that it had treated some of its suppliers unfairly.