Berenberg sees potential in 'priced for a disaster' Greencore

Analysts at Berenberg took a fresh look at Irish convenience food firm Greencore Group after its recent profit warning.

Berenberg reiterated its 'buy' rating but lower its target price on Greencore to 225p from 250p after the shares dived 30% in one week to under 130p when management downgraded guidance on earnings per share.

The reduced guidance was due to "company-specific factors" in the US, which allowed Greencore's shares to be given another chance by Berenberg, where analysts said "we admit that we have been too sanguine about near-term earnings", while acknowledging that "credibility in the story and management is at a low".

But the shares, at current levels of 7.5 times calendar 2019 EPS and with the enterprise value 6.3 times EBITDA, the market is pricing Greencore "for a disaster".

"While the US growth rates have disappointed to date, with lumpy volume ramp-up, we believe the core business is sound (and sticky), legacy problems are being dealt with and debt covenants are at little risk. We model several scenarios in this note but take a more conservative base-case outlook than previously," Berenberg's Friday morning research note read.

Analysts noted that half the downgrades had been triggered by operating losses at underutilised legacy assets, which were now in the process of being scrapped and that while the ramp-up of hoped-for new volume wins was pushed back around six months, Greencore's UK profit outlook was unchanged.

"While the downward revision of the FY 2018 outlook is clearly disappointing, we believe the share price reaction is significantly overdone. Along with our 'base' case, we model several scenarios that indicate a potential 2020E EBITA range of £106m-197m (margin range 4.5-7.1%) and an EPS range of 9p-20p."