Hilton brings home the bacon

Hilton Food Group celebrates its tenth birthday on the stockmarket in May. The meat packer's first decade as a listed company has been one of consistency and momentum, and the shares have rallied more-than threefold. It even surprised itself in 2016, and despite now trading at a premium to the sector, there's still something there for those investors late to the party.

Coming to market at 150p, Hilton fell to around 130p during the financial crisis. The inflection point came at the beginning of 2009, and the subsequent rerating has only paused for breath once - in a tough 2014 when the shares lost a third of their value.

They say "what doesn't kill you makes you stronger" and Hilton is up over 80% in the past two years. It should keep going, too, argues Panmure Gordon analyst Peter Smedley, who's just upgraded his target by 7% to 805p, implying potential upside of 21% even after a 5% jump Thursday to 665p.

That's because, thanks to expansion in a number of its key markets, strong operational performance and a foreign exchange tailwind, Hilton performed better than expected in 2016.

Its UK operation had a solid last quarter, with great momentum in Ireland, too. Sales increased "slightly" in Sweden and Holland, but tightening of Danish consumer demand weighed on growth there.

Management is happy with the roll-out of its new pizza business and it's just joined forces with SOHI Meat Solutions to launch a new company in Portugal. The joint venture should add €1.5 million (£1.3 million) to income in 2017 and €2.5 million in 2018, reckons Smedley. At full capacity in 2019, income should rise by €3 million.

Looking further afield, its Australian joint venture project is delivering strong growth from the Victoria plant and development of a new production facility is underway in Queensland.

Outlook

Smedley pencils in revenue growth of 8% in 2016 to £1.2 billion and a 15% jump in pre-tax profit to £32.2 million, giving earnings per share (EPS) of 32.8p. Currently on 20 times estimates for 2016 EPS, a 15.6p dividend would give a 2.3% yield.

True, a PE of 18.2 for 2017 still isn't cheap, but a premium is justified for a business boasting a solid track record with financial muscle to keep growing.

"To reflect our increased FY 2016-FY 2018 forecasts, current peer enterprise value/earnings before interest, tax, depreciation and amortisation valuation multiples, and our view that HFG now deserves to trade at a premium to the peer group in view of its impressively strong financial track record for organic and investment-led profitable growth, combined with an array of emerging, highly promising initiatives to expand the scale and scope of HFG's core business, we raise our target price to 805p (previously 755p)," explains Smedley, maintaining his 'buy' rating.

Hilton will give us more detail in its full-year results due March, but the outlook is certainly positive with new Portuguese and Australian expansion, supported by strong cash flow generation and balance sheet. New expansion opportunities are inevitable.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.