Farm Ireland

Saturday 20 January 2018

Glanbia profit results show last year's 'refusal' was a good call

John Shirley

There is a programme on BBC TV called Cash in The Attic. In it, people can unearth valuables which they almost forgot they had. I am reminded of this when I look at the latest sparkling half-year results from Glanbia plc. Turnover was up 33pc, profit rose 43pc and earnings per share were up 55pc.

Through the Glanbia Co-op Society, farmers still own 54pc of this cash cow. But it was a close shave. Had last year's proposed swap of Glanbia shares for Glanbia's Irish dairy and agribusiness gone through, farmer shareholders would be out of pocket to the tune of €200m today -- and that is only on share price.

Of course, one has to take a long-term view. But, for the foreseeable future, the big Glanbia profit potential lies with the US and global entities; the section that was being retained by the plc.

Operating margin in this section was at 10.4pc, more than double the 5pc margin in Glanbia's Irish-based business -- although a 5pc operating margin is still high by the norms of the Irish dairy processing sector.

We are told that the key to the Glanbia success in the US, and beyond, is the technology for harvesting the ingredients in whey. A few years ago, whey was a by-product of cheese which was fed to pigs.

Now it is the source of lifestyle and fitness nutritional products that are a must buy for every aspiring athlete. A remarkable 20pc of Glanbia's sales are now in products that were only developed in the past two-and-a-half years.

Over the years, Glanbia's constituent parts, Waterford and Avonmore, bought into enough duds. Now that farmers have their hands on a winner, they should hang in and watch it grow.

In proposing a swap of the Irish dairy and agribusiness for plc shares, coupled with the release of the co-op held plc shares, it is difficult to know what the men in plc suits were thinking. Indeed, time has shown that the 27pc who voted against the proposal to be wise men.

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Glanbia's results, and also those from Kerry plc, are all the more spectacular given the general malaise and gloom in the stock market. Indeed, farming and the food business could both be viewed as cash in the attic. The sector has been solidly with us all along, but was marginalised as investors chased after property and dotcoms.

Look at what happened in Dairygold Co-op. Reox was floated to cash in on the property boom. Long-held, and hard-earned, food brands were sold. Who bought them? Kerry Group plc recognised the intrinsic value of these assets. Dairygold can only bemoan the dissipation of its inheritance.

Of course, property made a lot of money for some and will do so again. It's a matter of timing and knowing when to get in and get out.

FBD plc's share price went above €40, helped by its involvement in property and hotels. FBD should have followed the example of meat baron Bert Allen, who exited his chain of Bewley Hotels just ahead of the crash.

Instead, FBD is facing write downs in its property asset values and FBD Property and Leisure Ltd is getting little or no return on its hotel and leisure investments. There is an interesting proposal to transfer €60m of its property portfolio to FBD Holdings and FBD plc instead of repaying an inter-company loan bond to this value.

Meanwhile, FBD's core insurance business has announced much-improved half yearly results. Within the insurance industry, FBD is regarded as an efficient operator with a low ratio of overheads to turnover. Its stock has recently attracted a blue-chip investor from South Africa. Just like food, people need insurance. The policy is to stick at what you know and what you are good at.

Farmer co-op shareholders in Kerry plc took a different approach to Glanbia in that they have ceded majority control. Every time that the co-op shareholding in Kerry plc grew close to €1bn, more shares were released and the cash distributed to the farmer shareholders. This has infused windfall cash into Kerry shareholders. Many may have needed the money, but their wealth would have been even greater had they held onto this asset.

The sad thing is that when the co-op goes below 50pc of a plc, there is the loss of influence and control to outside interests. I'm not saying it will happen but say Kerry plc wants to move itsheadquarters from Tralee, the co-op shareholders can do nothing to stop it.

One of the factors behind the good performance of Glanbia plc's Irish operation in the last accounts was the strong milk supply.

Maybe milk is now being regarded as a cash-in-the-attic gem that is not for disposal but is to be cherished in a world where priorities have changed and food security is a real factor.

Maybe even the men in the plc suits are glad that their attempt to shed milk production/processing in Ireland did not succeed.

At the recent announcement of half-year results, what was so vital last year did not merit a mention.

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