“To provide the best quality at the lowest cost."
This research report is divided into three sections. This is part 1 of 3. In this segment, we will explore:
Introduction of the company
History
The company
The business model
The sector and industry
The competitive advantage
The moat
A steadily reliable company
1.1 Introduction
Hilton Food Group is listed on the London Stock Exchange. Watson and Heffer, who are still on the board and are major shareholders, founded Hilton Food Group (HFG) in 1994. HFG packs and processes meat, fish, ready meals, and vegetarian/vegan products. The company uses automated processes for large international clients, forming long-term partnerships and offering supply chain services. HFG has increased its processing volume every year since 2007.
Hilton Food Group operates globally and frequently announces new acquisitions and collaborations. Key clients include Albert Heijn in the Netherlands, Tesco in the UK, ICA in Sweden, Sonae MC in Portugal, and Woolworths Group in Australia.
Here are four reasons why Hilton Food Group is worth analyzing:
Low margins make it hard for competitors to copy HFG's business model.
With a market cap of under £1 billion, it attracts little interest from big investors. Only six analysts cover the stock.
The stock has low liquidity.
It's a relatively "boring" company, providing steady, reliable performance.
1.2 The history
Several families who were already involved in the meat and slaughter industry founded Hilton Food Group (HFG) in 1994. Two members from these families, Robert Watson (chairman) and Philip Heffer (board member and former CEO), still hold significant positions and collectively own about 7% of the company.
Adding new partners and growing existing collaborations have been hallmarks of HFG's history. Its first partnership was with Tesco in the UK in 1994, which has since grown to other countries and product groups. In 2000, HFG started working with Albert Heijn, a partnership that remains strong today. These long-term relationships highlight HFG's ability to retain partners over time.
Since 2017, HFG has diversified its product range by acquiring companies in the fish and seafood market, such as Seachill and Foppen, and expanding its services with Foods Connected and Agito.
HFG operates in 19 countries, with a strong presence in Europe, Australia, and New Zealand. The company runs 24 locations for processing, packing, and logistics. In 2023, HFG announced a major new customer: Walmart Canada.
2) The company
Meat, fish, vegetarian, and more
2.1 The revenue model
The food packaging industry is highly specialized with very thin margins. Retailers, who are HFG's main customers, often have net margins below 5%. To manage costs, they outsource complex tasks like production, packaging, and logistics to companies that can perform them more efficiently. Hilton Food Group claims to offer the best quality at the lowest cost.
While HFG's primary focus is on meat packaging, it has expanded its services over time. These services now include:
Distribution
Robotics
Cloud services
Crate washing
Cloud services help customers manage, trace, and enhance the sustainability of their supply chains. Additionally, HFG has broadened its scope to include fish and vegetarian products. This shift is reflected in its annual reports: until 2020, the cover pages always featured the phrase "food packaging business." Starting in 2021, the term "packing" is no longer present on the cover.
Hilton Foods produces and processes food for international retail customers and engages in long-term collaborations with them. They operate with transparency with their customers, thus fostering mutual trust. For instance, Hilton Foods manufactures hamburger packaging for Albert Heijn. The Hilton Food Group introduces hundreds of new products to the market annually and enhances products that have been available for some time.
In addition to organic growth, Hilton Foods also regularly acquires companies. For instance, in 2022, it acquired Foppen, which has locations in the Netherlands and Greece. In 2021, it acquired Dalco in the Netherlands, a company specializing in vegetarian and vegan products. In 2019, HFR Foods in the United Kingdom was acquired, and in 2017, Icelandic Seachill. Figure 3 illustrates the collaborations and acquisitions. HFG leveraged its knowledge and expertise in acquisitions, as demonstrated, for instance, in an article by the Financial Times: "Since Hilton became a 50% shareholder in Dalco in 2019, it has utilized its manufacturing expertise and capital resources to further expand Dalco's range into the next generation of vegan and vegetarian products. During this period, Dalco has experienced significant growth and has outperformed management's expectations.”
Are the acquisition prices reasonable?
Dalco (vegetarian food) had a revenue of approximately €60 million and a profit of €3.2 million (it is unclear whether these figures are significantly lower due to corona). The takeover price is estimated at around £100 million, or approximately 30 times the profit. Dalco had two locations, but in 2023, one of its facilities closed, and it will now continue in one location. A £1.2 million loss was included in one impairment test (annual test of whether goodwill should be written off/taken as a loss). From this data, I conclude that the price paid for the takeover was too high.
Foppen (with smoked salmon as its main product) was acquired for €90 million at the end of 2021/beginning of 2022. Foppen had a revenue of £86 million in 2022 (in the acquired 9 months) and an operating profit of £4.3 million. Foppen supplies to Costco for example, and is active in countries such as the Netherlands, America, Canada, China, and Greece. Additional shares were issued for the takeover. Foppen has been acquired for 9 times the EBITDA, while HFG traded at approximately 7 times the EBITDA. This seems to me to be a reasonable acquisition that fits well within HFG's product range.
Seachill was acquired in 2017 for £80.8 million. Seachill had a revenue of £266.3 million in 2016 and £10.4 million EBITDA. HFG paid 7.8 times the EBITDA for Seachill. Seachill was taken over partly through a share issue and a loan. With this acquisition, the company entered a new market: the fish market. This seems to have been a reasonable acquisition for a not-too-high price.
Fairfax Meadow was acquired in 2021 for £23.8 million. This acquisition was paid for in cash (debt facilities used). In 2019 (a non-corona year), EBITDA was £4.4 million. Fairfax Meadow is a catering butcher in the United Kingdom which supplies pubs, bars, restaurants, and hotels. Fairfax Meadow is acquired for 5.4x EBITDA (2019). This seems to me to be a good takeover that fits within the meat branch of HFG. Due to the Corona pandemic's severe effects on Fairfax, perhaps HFG could demand a better price.
Where and with what activities is HFG present?
The white boxes represent areas not yet addressed by HFG, while the blue boxes indicate sectors where the company is already present but still has room for expansion, as shown in the image below.
About the revenue model
During our research, we noticed three other aspects that are crucial for a better understanding of HFG's revenue model:
The interests of HFG and its customers are aligned: as HFG introduces better and tastier products to the market, both the customer (such as Albert Heijn, for example) benefit through increased retail sales, as well as Hilton Foods itself through higher volume.
In long-term contracts with its clients, Hilton uses a "cost-plus" strategy (a fixed profit margin per tonne of packaged volume) or an agreed-upon packaging rate to determine prices.
They operate local production facilities in Poland, the Netherlands, England, and Portugal, among others, which are tailored to the specific characteristics of each market. These facilities are overseen by local management, which possess a deep understanding of regional and market dynamics.
Geographic revenue distribution
Europe is the most profitable market for HFG (£40.9 million), then the UK and Ireland (£35.5 million), and APAC (Asia Pacific, where HFG operates in Australia and New Zealand) (£30.3 million) are at the bottom of the list.
Sustainability
To remain an interesting player in a world that imposes increasingly higher sustainability requirements, HFG has set two sustainability goals. Besides the fact that sustainability is important to remain competitive with other players, this is also a great test to see whether management can achieve the stated objectives:
Improve energy and water efficiency in facilities by at least 10% before the end of 2025, compared to the 2018 baseline.
Achieve 100% renewable electricity for all its own operations in Europe by the end of 2025 and worldwide by 2027.
The 2022 annual report stated the following about sustainability: “Through product innovation, we are working to decarbonize cattle, deliver zero-emission factories, and eliminate deforestation. We are committed to achieving fully recyclable retail plastic packaging and have achieved 70% recycled content plastic packaging across the Group.” The FY 2023 results also show that they had a 14% CO₂ reduction and 42% less food waste compared to 2020. Seventy percent of plastic packaging is now recyclable.
Next growth driver
There was an opportunity in the 2022 annual report that really caught my eye. On page 83, it is stated that HFG expects more revenue from IT and automated solutions in the medium term. This includes providing information reports and improving the supply chain for customers. This makes customers more efficient and better capable of monitoring and reducing emissions. The Hilton Services and Greenchain Solutions components are responsible for this. What I find so interesting about this is that they estimate the chance of it being “very high” and the impact to be “high”. This makes it seem as if HFG has a new growth driver with higher margins in store.
According to the 2022 annual report, Foods Connected (of which HFG now owns 65% of the shares) had £2.9 million in revenue and an operating result of £262.000 (9.1% operating margin). This part is expected to contribute significantly to further growth. In FY 2023, it is stated that both Foods Connected and Agito have attracted new customers in new markets.
2.2 The sector and industry
Hilton Food Group operates in a highly specialized market. It doesn't have many direct competitors offering the exact same products/services. Competitors include the publicly listed Finnish company HKScan and Danish Crown. Another significant player in the packaging industry is Berry Plastics Group. However, Berry does not seem to offer the same packaging products as Hilton Food Group, but they may potentially enter this market or make an acquisition. Amcor is another competitor that also manufactures packaging, but they currently do not specialize in packaging meat, fish, and vegetarian products exclusively for retailers, such as Hilton Food Group.
The table above could imply three things:
HFG is the lowest-cost provider;
competitors do not include the revenue of the purchased and sold product (due to the cost-plus model that HFG uses), or
HFG operates with significantly lower efficiency, resulting in less profit per employee.
Particularly because of management's statements, I am inclined to consider the first statement as the most plausible. It could also be a combination of being the lowest-cost provider and the accounting method or operating less efficiently.
Profit in this market will mainly be achieved by processing a large volume and by forming long-term partnerships with customers.
The companies in this market seem to have been around for a long time and are thriving. For example, Hilton Foods Group was founded in 1994, Danish Crown in 1887, and HKScan in 1913. According to the Lindy effect, these companies have a greater chance of still existing in the next 20 years than companies that are less than 20 years old. While creating sustainable shareholder value is challenging for most companies in the packaging industry, HFG has succeeded well, with a CAGR of approximately 9.5% since the IPO in 2007 (excluding dividend). Finland's HKScan has dropped by 90% since its IPO in 2008.
In the past, every supermarket had its own butcher. Nowadays, you hardly see butchers in supermarkets. This model has changed and continues to change. Butchers are expensive, and it is not efficient for supermarkets to have one. Additionally, pre-packed meat offers hygiene benefits and a longer shelf life. This is a long-term trend that will gradually continue in more and more places in the world, from which HFG benefits.
According to various sources, the food and meat packaging industry seems to be growing at about 5% per year.
How difficult is that… packing meat
3.1 The moat
I believe that Hilton Foods Group does not have a traditional 'moat'. However, there are small competitive advantages, such as the focus on the lowest costs. CEO Steve Murrells said:
“The Group is progressively widening its customer base and maintaining a high level of investment in state-of-the-art facilities, which, together with management’s continuous focus on reducing costs, allow it to operate very efficiently at very high throughputs and price its products competitively.”
HFG operates decentralizedly, which is crucial for a company that regularly acquires other companies. This was stated in the 2022 annual report:
“Hilton operates a decentralized, entrepreneurial business structure, which enables it to work very closely and flexibly with its retail partners in each country, in order to achieve high service levels in terms of orders delivered, delivery times, compliance with product specifications and accuracy of documentation …”
HFG only works with a limited number of retailers in each country in which they operate. This creates mutual trust, a focus on the customer and efficiency benefits (such as locating the packing factory close to the customer's distribution centers, thus reducing transport costs).
The meat processing and packaging market is not a sexy business to compete with. A lot of investments are needed for a little profit, which is not an attractive proposition for many companies. Would you invest £854 million in buildings, machinery, leases, inventories, and intangible assets for £38 million profit? For many companies, the answer is simple: no.
HFG has years of knowledge and expertise acquired to ensure that the system runs as efficiently as possible. This may also create a legacy, which is negative.
R&D and new ideas from Poland can also be introduced in the Netherlands and other countries. New machines, but also meat, for example, can be purchased in bulk due to the size of the group.
Part 2 is coming out tomorrow!
