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Patties Foods Limited surges on profit success: Is it time to buy?

What: Australia’s favourite frozen food company Patties Foods Limited (ASX: PFL) on Monday delivered a strong full-year results presentation that featured a return to profit growth in the first half of 2014 and a lift in revenues, despite aggressive discounting from major supermarkets.

In what is becoming difficult to find these days, Patties Foods was able to pass price increases onto major customers and improve operational efficiency to offset increased input costs and competition in the market place.

So What: Patties Foods’ stable of well-known Australian frozen food brands are sold in major supermarkets, petrol & convenience stores, and to catering companies. Iconic brands include Four’N Twenty, Herbert Adams, Nanna’s, Patties, Creative Gourmet and Chef’s Pride.

New CEO Steven Chaur appears to be having a positive impact on the business with investment in new products and effective advertising delivering profit growth in the second half of the financial year. Revenue increased by 1.2% over the last 12 months, while underlying net profit fell by only 2%, less than expected after a 7.5% fall in the first half of the financial year.

Investors subsequently pushed the share price up nearly 10% in early trade on Monday, assuming that Patties’ management can continue to turn around the business after a lacklustre 2013.

What Now: A strong brand is important for success in any retail endeavour. It gives the owner of the brand scale and power to negotiate better deals with customers and suppliers, and provides a level of protection if cheaper alternatives enter the market.

The power of Patties’ brands is highlighted by the dominance of the Four’N Twenty brand in frozen savoury goods, Nanna’s brand in the frozen fruit and desserts segment and overall strength of the brands in the supermarket savoury goods segment. Patties grew sales 21% over the year and Nanna’s frozen fruit sales grew by 92%, while Four’N Twenty is the market leader. These gains helped to offset the loss of a major private-label frozen fruit supply contract.

The outlook for Patties Foods is bright and management noted that efforts to improve operational efficiency would continue over the next 12 months to boost margins and increase product quality. I’m a big fan of the work management is doing to turn around the company’s fortunes by leveraging the iconic brands under management. These efforts should help to sustain the group’s 5.5% dividend yield.

Incredibly, Patties Foods' dividend pales in comparison to that of the Top Motley Fool dividend stock of 2014-15. You can find the free report by clicking here.

#1 dividend-paying stock for 2014-2015

Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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