Thursday 20 September 2018

Gathering storm clouds unsettle shareholders in Irish food giants

Gavin McLoughlin examines the factors behind share price falls - and rises - at the companies that sprung out of Ireland's co-operative movement

Will shareholders in dairy sector companies such as Kerry Group, Glanbia and Donegal Investment Group get the cream, or be left with less palatable rewards? Currency fluctuations and concerns over growth could sour investments. Stock image
Will shareholders in dairy sector companies such as Kerry Group, Glanbia and Donegal Investment Group get the cream, or be left with less palatable rewards? Currency fluctuations and concerns over growth could sour investments. Stock image
Gavin McLoughlin

Gavin McLoughlin

Some of Ireland's biggest businesses trace their roots back to the co-operative movement, which began in this country in the 19th century.

Evolving into publicly-listed companies has proven to be a lucrative move for the farming groups that were so important in the development of Glanbia, Kerry Group and Aryzta. But their performance has not been great for shareholders of late. Instead, low-profile Donegal Investment Group has been the star performer in this category of companies.

Glanbia was in the headlines last week after reporting results and despite a solid result on earnings before interest tax and amortisation (ebita) from continuing operations, the share price fell pretty steeply. That continued the trend of the past 12 months - a period in which the stock has gone from more than €18 to the current €14.

The company has been diversifying from its roots in the Irish dairy sector, with a big focus on so-called "performance nutrition" - protein shakes and other performance-nutrition products. This has been a hot trend in recent years but the jury is out on whether it is a fad with a limited shelf life, or something with more endurance.

One of the big problems for Glanbia is currency - a lot of business is done in the United States and the dollar has been weakening against the euro of late.

However, the Trump administration's recent tax overhaul did provide a one-off tax gain of almost €40m.

Ian Hunter, an equity analyst at Investec who covers the food and beverage sector, said there had been concerns in the market about Glanbia's ability to maintain organic growth. That, as well as currency, is one of the reasons why the stock has been on a downward trajectory prior to Wednesday's results announcement. Another is the increase in bond yields. Glanbia and stocks like it, said Hunter, are "seen as stable bond alternatives".

"The thought is that as bond yields are rising, people are selling out and going into the bonds," said Hunter.

In the event it turned out that the company managed to maintain decent organic growth when it reported results on Wednesday but its guidance was below expectations.

Group managing director Siobhan Talbot spoke to analysts last Wednesday about currency. "Given the significant movement in the US dollar in recent months, we expect an approximate 8pc translational headwind if the euro-dollar rate stays around the current level," she said.

The focus for 2018, Talbot said, is driving revenue through growth in sales volumes. "We will invest across geographies and our brands to achieve this. We will invest in building the talent and infrastructure capabilities to support our long-term growth ambitions in this increasingly digital age."

Darren McKinley, senior Irish equity analyst at Merrion Capital, believes the company might make an interesting takeover target for food giants such as Danone or Nestle.

"I would say it's one of the most upbeat outlooks - outside of currency - from Glanbia that I've seen since I've started covering them. They've got growth coming ... and they've got a very strong balance sheet for future growth opportunities.

"Danone or Nestle, Glanbia is supplying ingredients to them and they're well aware of what Glanbia do and their niche market."

But McKinley believes management's decision to increase the dividend payout will make it harder for a buyer to get the farmers on board. Glanbia Co-op owns just under a third of the business - a stake worth more than €1bn.

Kerry Group, where the co-op owns 14pc, also had results out last week. Its shares have been battered so far this year - losing 13pc. Like Glanbia, it has also been suffering the effects of rising bond yields, says Hunter.

It's also trading at a hefty multiple - and currency is an issue too.

"There's great volatility, not only in the dollar but also sterling," Hunter said. "And in Kerry's particular case, they have an exposure to the UK and quite a number of their products sold in the UK are manufactured in Ireland ... they are producing the product in euros and having to sell it in sterling."

Origin Enterprises is another that has been experiencing turbulence of late. The share price is at €5.65 - a level last seen in late 2016. Just weeks before a results announcement, the company's chief financial officer Imelda Hurley has announced she is leaving in April. However, the company has a strong balance sheet and a share buyback may be a good way of appeasing investors.

McKinley at Merrion believes Hurley has performed well in the job. "Any acquisition she has done has been good but, unfortunately, the share price has underperformed because soft commodities [things like wheat or barley that are grown rather than mined] have been weak. What I've said is that hopefully one of Imelda's last acts will be to seal a share buyback. I wouldn't be surprised if they do announce it. I think the fair value of that company is probably closer to €7.50 or €8 a share. Soft commodities normally move in tandem with the likes of crude. I suspect that crude has bottomed."

Brexit is another concern for Origin. It does a lot of business in the UK, and there is lots of uncertainty about the regime for farmers after the country leaves the EU and the Common Agricultural Policy. The positive is that the day-to-day business is in a better position than it has been for quite a while, according to Hunter.

"The position that they're in now is better than it has been for the past two years in terms of growing conditions, the crops that are in the ground. The type of thing that would generally be seen as the day-to-day business, you would say is stronger this year than it has been for the last two years."

The company also owns property in Cork. A sale of this in the current strong market may also be a good way of generating funds for shareholders.

At Aryzta, new chief executive Kevin Toland's honeymoon is over. The former Glanbia man - once tipped for the job now held by Siobhan Talbot - faces challenges that go well beyond those facing his erstwhile colleague.

Aryzta is highly leveraged and expects like-for-like full year ebitda excluding currency effects and disposals, to be 15pc behind last year.

On a recent analysts' call Societe Generale analyst Warren Ackerman said it "looks like a complete shambles" - which Toland said he took "slight exception to".But the new Aryzta boss acknowledged he wasn't happy with the company's performance and said turning it around is a "multi-year endeavour".

The best performer of all is low-profile, little-known Donegal Investment Group - formerly Donegal Creameries - which has reached all-time highs in recent weeks. Management's strategy has been to dispose non-core assets and a number of strong deals have been concluded. One was the 2,400-acre Grianan estate, a large property sold for €17.5m last year.

Earlier this month, the company announced it had received over €40m in cash, with a further €2m to come, after concluding a row over its investment in Monaghan Mushrooms.

It now plans to return €45m-€50m of capital to shareholders via a share buyback scheme.

More funds could be realised via the sale of an 80pc stake in speciality dairy business Nomadic.

"Following unprompted inbound expressions of interest from potential acquirers, the board of Nomadic Dairies Limited is reviewing its strategic plans for the business to maximise shareholder value and as such has appointed corporate finance advisers to review available options for the business," Donegal told the market earlier this month.

If that's sold off, the main parts of the business left would be in the seed potato and animal feed sectors. The question becomes what happens to Donegal when the asset-disposal programme is finished. Is every piece of the business going to be sold off?

"It's difficult to know. They may be looking to back into, or merge with, other public companies in the same areas," said Hunter. If management does do a transaction, and continues their strong run of dealmaking, Donegal shareholders may continue to get the cream.

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