In a note issued today, Investec analyst Nicola Mallard said the project, announced last week in the meat packer’s interim report, “appears to have run into more complications than originally expected”.
Hilton Food would take longer than expected to drive up volumes at its Huntingdon facility to the levels desired by the supermarket, she said. As a result, those levels would not be achieved in the second half of its financial year, as initially thought, but would be delayed by about nine to 12 months, said Mallard.
She estimated the full contract was worth £120M annually, but said she believed Hilton Food might only see £25M worth of that in the current financial year. In addition, it might only realise £50–£60M of its value in the 2015 financial year. After that, she predicted production for the deal would be up to speed.
Cost likely to increase
In addition, Mallard said the cost for the project was likely to increase by between £1M to £2M.
As a result of these problems, she slashed predictions for the company’s 2015 pre-tax profit by more than £6M, from £33.7M to £27.5M. That said, she forecast a significant step up in pre-tax profit for the business for the 2016 financial year.
Shore Capital analyst Darren Shirley said the expansion at Hilton Food’s Huntingdon plant had become more involved than expected, entailing three dedicated packing units and a specialist logistics unit. Previously, just one further unit had been envisaged, but more had been required to meet an increase in volumes of 40% from Tesco, he claimed.
‘Delay the flow’
“Whilst management confirmed the volume flow from Tesco has been as agreed, we also note comments that Hilton Food will delay the flow of future volumes to ensure timely completion of the extension,” said Shirley.
“Hilton UK will therefore experience higher costs and lower volumes/sales for a period, the effect of which is expected to impact profits through to Q1 2015 [the first financial quarter of next year] at the earliest.”
Hilton Food has not so far responded to the analysts’ comments.
In its interim results statement for the 28 weeks to July 13, Hilton Food Group reported operating profit up 1.1%, from £13.4M in the same period last year to £13.6M. Turnover fell by 0.3% comparing the same periods, from £593.8M to £592.3M.
It predicted an investment of £21.3M in its Huntingdon plant as a result of its contract with Tesco.