Friday 24 November 2017

Food price inflation will hit Aryzta margins

LAST week's nine-month trading update from Aryzta, the former IAWS, indicating that full-year earnings (after-tax profits) per share would be in line with earlier forecasts of about €3 per share failed to further boost the share price which finished on Friday at €37.45, down a euro for the week.

However, with the Aryzta share price having risen by 22 per cent over the past year, out-performing the index of non-financial Irish shares by almost 20 per cent in the process, it could be argued that the good news was already in the share price.

What the trading update demonstrates, yet again, is that Aryzta is now reaping the benefits of acquisitions it has made over the past year. These include the June 2010 acquisitions of Fresh Start Bakeries and Great Kitchens for a combined $1.08bn (€1.25bn) and the August 2010 purchase of the 50 per cent of Maidstone Bakeries, which it didn't already own, for €349m.

As a result Aryzta delivered sales growth of 31 per cent to €2.9bn in the nine months to the end of April. Even when the effect of these acquisitions and favourable currency movements are filtered out, underlying revenue growth was still 5.5 per cent. If, as seems likely, the company delivers its promised €3 earnings per share it will represent an annual increase of some 60 per cent.

However, while Aryzta will try to pass on raw material inflation costs on to its customers and wring greater efficiencies from its newly-acquired businesses, the likelihood is that the big multiples will force it to absorb at least some of the pain in the form of lower margins next year.

Sunday Indo Business

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