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Rebound in UK potato sowings to end, says Produce Investments

The bounce in UK potato sowings looks poised to go into reverse, Produce Investments said, as it unveiled results showing a recovery in profits, and an appetite for further expanding from its core business in the root crop.

Angus Armstrong, the Produce Investments chief executive, told that his "gut feeling" for UK potato sowings for the 2018 harvest was that they would "show a slight decline".

That would follow sowings growth of 4% in both 2016 and 2017, expansion which has, along with improved yields this year, put the UK on course for a harvest this time of 5.7m tonnes up 6% year on year.

However, output at this level, ahead of domestic needs, looks likely to weigh on values, so depressing sowings prospects ahead, with Mr Armstrong forecasting the potential for "more moderate raw material pricing" compared with 2016-17.

'Turn in the cycle'

Already, average UK prices of non-contracted potatoes have fallen back below £100 a tonne, standing at £94.01 a tonne this week - down 49% year on year, according to the AHDB bureau.

"Because of decent returns, the agricultural mentality is to put more crop into the ground," Mr Armstrong said, although adding that Produce Investments - owner of the Greenvale packing business, one of UK's big three potato suppliers had not itself followed this trend in its cropping operations.

It now looks like "there has been a turn in the cycle" towards lower potato sowings.

Barbecue boost

The comments came as the group, which owns the Greenvale potato packing business, unveiled an 88% jump to £6.58m in pre-tax profits for the year to July 1, a result swollen by one-off factors, on revenues up 8.1% at £200.1m.

Underlying operating profits fell by 9.1% to £8.37m, although this represented a marked recovery from the result in the first half of the financial year, for which the figure came in at just £243,000, a drop of 97% year on year.

The improvement reflected in part seasonal factors, with a warm start to summer boosting sales of Jersey Royal potatoes.

"We need good weather to drive volumes," Mr Armstrong said, adding that "it helps when everyone is barbecuing".

'Acquisition opportunities'

However, he underlined too the boost to profits from the group's growth in markets such as food service and wholesale, besides in processed foods.

"It helps that if you have one sector that is not performing so well, you tend to see another segment that is performing well," Mr Armstrong said.

Such thinking was backing a quest for deals, with Produce Investments "in a strong position to grow and take advantage of any acquisition opportunities which may arrive".

He told "We want to see a much bigger produce base" beyond the potato and daffodil markets currently served.

"We want to go up the value chain too," shifting further into higher margin prepared foods from its core fresh food markets, in which the group has added a third "mainstream retail account" to its customer portfolio.

Market reaction

After the results, broker Whitman Howard restated a "buy" rating on Produce Investments shares, saying they "look attractively valued on a 7.7 times" price earnings multiple.

Shore Capital also restated a "buy" rating, saying that the prospect of "more moderate" potato prices ahead, coupled with "seemingly decent momentum going into the year" and further growth in the customer base signalled profits growth ahead.

Numis also kept its "buy" rating on the shares, with a target price of 286p.

The shares stood 1.4% lower at 184.5p in morning deals in London.

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