Smaller Companies: Meat business will get tougher

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The Independent Online
THE red meat butcher Sims Food took a significant step in its attempt to secure a future last week with the sale of TS&W, a 51 per cent owned meat importer and trader.

The price agreed was relatively small at pounds 1.8m. But the total benefit to Sims was more than pounds 5m, once inter-company debts that the buyer is taking over are included.

The disposal will bring the ratio of borrowing to net assets down from 70 per cent to 50 per cent. The sale, however, is more than a debt relief exercise. It marks a watershed in Sims' rethinking of strategy.

Change is needed. Problems surfaced at Sims last June when the company made a depressingly stark profits warning. Profits of pounds 9.3m in the year to March 1992 would be followed by a loss, it said.

There is substantial overcapacity in supplies of meat - some estimate it outstrips demand by 70 per cent.

A rights issue in 1991 funded an upgrading of Sims' abattoirs ahead of stringent new pan-European hygiene regulations. However, implementation of the new regime was delayed until 1996, keeping old slaughterhouses open - and increasing capacity.

Oversupply obviously drives prices down. Sims' problems were compounded by devaluation of the pound, which pushed up the cost of meat.

And the company's plight was made all the more dire because supermarkets - which make up most of its customer base - forced it to absorb most of the increased cost.

Shares, which had been trading at 340p in 1991, slumped from 182p to 129p. Confidence has been further sapped since then and despite the TS&W sale the shares closed down 3p on the week at 104p.

Over the last year Sims shares have underperfomed the stock market average by 60 per cent, and lost 55 per cent of their value compared to the food manufacturing sector - which was itself one of the poorest performing stock market groupings.

The sale of TS&W is significant because it is a visible sign that Sims is distancing itself from low-margin commodity meat trading and attempting to grab more profitable value-added business.

Purely as a trader, TS&W's attainable profit margins are mean. Sims reckons it can earn more by processing meat into beefburgers and sausages, or by adding sauces and spices.

The shift to added-value products sounds sensible, but added value also means added cost. With the supermarkets unlikely to let up on prices, it will be difficult to forge wider margins on any business operation.

In the meantime Sims will continue to spend most of its time cutting and packing beef and lamb into polystyrene and plastic for the supermarkets.

Sims lopped one-third off its full- year dividend in 1993, paying 7.5p against 11.25p. All the indications from the company are that it will maintain the payout this year.

But the stock market - which has marked the shares down to a level where they yield 10 per cent - plainly doubts Sims' commitment on the dividend. At best the market view is that another cut is on the way.

If Sims survives until 1996 its state-of-the-art abattoirs should underpin a solid and sustainable future. However, things look as if they will they will get worse before they get better.

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