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Investing.com -- RBC Capital Markets has initiated coverage on Greencore Group (LON:GNC) with an ’outperform’ rating, citing the company’s improving profitability, growth initiatives, and potential for further share price gains.
Analysts at RBC flag that while Greencore’s stock has seen a strong recovery of 95% since early 2024, it remains 22% below pre-pandemic levels, leaving room for additional upside.
Greencore, one of the UK’s leading suppliers of convenience foods, is in the process of streamlining operations under its 2023 strategic plan, aiming to create a more efficient and profitable business.
Analysts note that the company is targeting a return to pre-pandemic profit levels of about £106 million.
Profit margins, which fell to a low of 2.6%, are forecast to rise to 6% by 2027, supporting a return on invested capital of about 13.6%, up from 11.5% in 2024.
The company has also reinstated its dividend, with a yield projected at around 2%, and could increase shareholder returns through share buybacks and potential acquisitions.
Despite challenges posed by inflation and wage increases, Greencore is positioned to outpace the broader grocery market, with a projected annual revenue growth rate of 3.5% over the next three years, ahead of the sector’s expected 2.9% growth.
This momentum is driven by volume recovery, product innovation, and new contract wins. The company has exited underperforming contracts and is now focusing on high-growth segments, which analysts believe will contribute to sustained expansion.
Greencore’s operational transformation is expected to drive continued earnings growth. RBC analysts estimate that if the company pursues selective acquisitions, leveraging its balance sheet slightly, it could boost adjusted earnings before interest and taxes by 5.6% in 2026, adding an estimated 7% to its enterprise value.
The company is investing between £15 million and £20 million in technology upgrades over the next two years, with a focus on automation and efficiency improvements, which could further enhance margins.
Greencore will detail its medium-term strategy at its Capital Markets Day on February 5, 2025. Analysts think a return to pre-pandemic margins (around 7%) could improve forecasts and stock price.
Comparisons with rival food manufacturer Bakkavor suggest that while both companies operate in similar segments, Greencore has an edge in distribution, with its own fleet delivering products directly to stores.
While Bakkavor has a higher dividend yield at 6%, Greencore is balancing dividend payments with share buybacks as part of its capital return strategy.
RBC Capital Markets’ price target for Greencore is 240p. This is based on 11.5 times estimated 2025 EBIT, similar to its peers. RBC expects operational improvements and a focus on higher-margin products to drive recovery and long-term value.