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Sunday share tips: Cranswick, Sumo Group

Sun 23 September 2018 13:37 | A A A

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(Sharecast News) - In the 'Inside the City' column for the Sunday Times, Sabah Meddings wrote how Hull-based food producer Cranswick was turning 'fifth quarter' cuts of meat - a pig's ears, trotters and intestines - into lucrative business.

The FTSE 250 firm had sales of £1.5bn last year, on like-for-like growth of 12.7% over the prior year, with its shares proving a top choice for investors.

Meddings noted that someone who bought in to Cranswick in 2011 would have now quadrupled their investment thanks to the company's series of facilities investments and lucrative acquisitions.

But what was keeping it a tantalising play in 2018 was threefold, according to Meddings, citing China, African swine fever, and US president Donald Trump.

Since early August, 22 outbreaks of the highly-infectious African swine fever have been reported in seven different provinces of China.

Given there is no treatment or vaccine for the disease, the only option for small farmers was often to destroy their livestock.

The short-term effects of that was often a weakening in pork prices as the market is flooded by panic selling, though Meddings said those prices were likely to quickly rise as supply died out, which would be of benefit to an outfit like Cranswick.

Trump's trade war with China was also likely to be a benefit to British food producers, with increased tariffs on American pork making European meat more competitive for as long as the trans-Pacific trade spat continued.

Overall pork prices have been falling, currently sitting 14.6p per kilogram lower than they were a year ago, but that had still benefited Cranswick as increased affordability drove volumes.

The company was also reportedly lifted by the sweltering summer in the UK, which drove consumer demand for sausages as they spent long evenings around the barbecue.

Medings noted that the firm was currently trading at a "racy" forward price-to-earnings ratio of 24.2x, well above its three-year historic average of 19x.

However, she did say that analysts were suspecting that its current strong performance had already been priced in, with its share price plateauing in recent months, closing at 3357p on Friday.

The reasons for caution were also there, with chief executive Adam Couch cashing in £0.28m worth of shares for "personal financial planning" reasons earlier in the month, and its first quarter revenue growth of 3.2% slower than the last three years - though still ahead of the market as a whole.

"If geopolitical events continue to fall in Cranswick's favour - something analysts at Peel Hunt say could have 'material consequences' - there could still be significant upside in the long term," Meddings wrote.

"One to watch - hotdog in hand."

Over in the Mail on Sunday, Joanne Hart was looking at video games - once the domain of teenage boys, but now a £90bn global industry, with an average customer age of 35 - and specifically, game developer Sumo Group.

The firm, which floated on AIM last year, has worked with a number of the world's largest publishers, including Microsoft, Sega and Sony.

Its shares are currently sitting at 164p, with Hart saying in her 'Midas' column they "should increase materially in value" over coming years.

Some of Sumo's work involves producing game titles from scratch for its publisher customers, and sometimes it is contracted to work on particular aspects of a game, such as its design or ensuring its compatibility with a range of platforms and devices.

Its games are varied, with the company having worked on 'Team Sonic Racing', featuring Sega's popular hedgehog character, and puzzle-based title 'Little Big Planet'.

Hart said Sumo is frequently 'deeply involved' in a game's development, allowing it to develop close and long-term relationship with customers, with the firm also concentrating on the AAA-game end of the market - the premium segment, where titles can cost millions and take years to turn out.

Crucially for its books, Sumo's work means it gets paid incrementally as a game is developed, reportedly often the recipient of monthly instalments.

Sumo Group was launched in 2003 by chief executive Carl Cavers and three of his colleagues, two of whom are still with the business.

Hart said they spotted a gap in the market, having already worked in the sector for a number of years, founding a professional firm to provide reliable creative and technical services to the big-name publishers.

It was bought by an American firm in 2007, but was purchased back by Cavers and his co-founders in 2014, having expanded rapidly since then - revenues have improved to £28m from £16m, and profits have more-than-doubled to £7.5m.

Sumo's geographical reach has expanded too, with studios in Brighton, Newcastle and Nottingham as well as its Sheffield headquarters, and offices in Canada and India.

Hart said its first few months as a publicly-traded company had been "encouraging", with first-half figures due on Tuesday expected to show "robust" growth.

Brokers had predicted sales of £37m and profits of £9m for the full year, with room for more improvement next year.

The ongoing shift from selling games on physical media, such as discs, towards digital downloads was also seen as a good thing for Sumo, as it would give it further opportunity to add features and make more money.

Its customers recently started offering the firm royalties too, said Hart, which could be another driver of revenue growth.

The fact that 22% of shares are held by directors and employees was also said to be encouraging, with more than 150 of Sumo's 540 staff having a material interest in how the business performs.

"Sumo is a well-run business, with loyal customers and high profit margins in a fast-growing market," Hart wrote.

"Most of its staff are based in South Yorkshire, which has developed a reputation for creativity and innovation in the video gaming world.

"At 164p, the shares are a buy."

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