For any investing U.K. Dopers who missed Thursday’s news, RHM Ltd.*, the maker of Mr. Kipling cakes and Hovis bread, plans to list its shares in London. No guarantees about how the stock will perform, but this may be one to watch, I’d argue.
The investment case for RHM, like that for competitor Premier Foods Plc, is based on the company’s stable of established national brands, which also includes Saxa salt and Robertson’s preserves. Both businesses get just over half their sales from their own branded goods and the rest from making ready-to-eat foods such as sandwiches and chilled meals for U.K. supermarket operators under the grocers’ own names. RHM says it gets about three-quarters of its sales of branded goods from 12 brands that are top-ranked in their categories and that at least one of its branded products can be found in 98% of British households.
The background here is that the British food retailers have been engaged for some time in an unrelenting price war which in turn is putting pressure on the grocers’ suppliers. The branded goods give the foodmakers some leverage in negotiating with the supermarket operators, as the grocers want to have those on their shelves, whereas the food retailers are in the driver’s seat when it comes to pricing of own-label goods, which are much less profitable for the food producers.
Stock in Premier Foods, which makes Branston pickle and Typhoo tea, has climbed a bit more than 50% since the company went public about a year ago. In comparison, shares of another comparable company, Northern Foods Plc, have hardly moved in that time. Northern Foods also owns some grocery brands, such as Fox’s cookies and Goodfella’s frozen pizzas, but the company doesn’t say how much of its sales come from branded goods. My hunch is that the company gets a much smaller percentage of its sales from branded goods than Premier Foods, which in turn may do much to explain the disparity in the performances of the shares.
RHM has annual sales of £1.53 billion, on par with Northern Foods (£1.42 billion) and substantially larger than Premier Foods (£842.2 million). The company said Thursday it’s aiming for the stock sale to result in a market cap of £1 billion to £1.3 billion, which would make RHM quite a bit bigger on that basis than Northern Foods (£789.4 million) or Premier Foods (£830.8 million). RHM hasn’t said how many shares it will sell, so I can’t calculate the yield yet; I give Premier Foods a forecast yield of 4%**, and Northern Foods stock yields 6.2%.
Anyway, this is all strictly IMHO, do your own research, this does not constitute encouragement to buy or sell securities of any kind, etc. Happy investing.
Disclosure: I own stock in Northern Foods, which makes those melt-in-the-middle chocolate puddings that starred in Marks & Spencer’s television ads.
*Perhaps better known under its former name of Ranks Hovis McDougall. Buyout firm Doughty Hanson, which is floating the company, bought the business from Tomkins Plc, a kind of mini-industrial conglomerate that rejoiced in the nickname “guns to buns” because its businesses included firearms maker Smith & Wesson as well as Ranks Hovis.
**Premier Foods declared a dividend of 9 pence a share when it reported final results in March, but did not pay a first-half dividend. The forecast is based on Friday’s closing stock price and the assumption that the company maintains the second-half dividend in the current year and pays a first-half dividend amounting to one-third of the total annual payout.