Business Irish

Saturday 21 September 2019

Richard Curran: 'Glanbia faces uphill battle as August share price slump takes toll'

Siobhan Talbot
Siobhan Talbot
Richard Curran

Richard Curran

As August drew to a close, uncertainty about Brexit, trade wars and recession fears in the US remained very strong. No wonder it was such a tough month for Glanbia shares, which have shed around 28pc since the start of August.

Back in July, when Glanbia announced a profit warning, the stock was hit very hard. At the time, chief executive Siobhán Talbot said earnings would be hit in 2019 but the firm remained solid on its longer-term five-year plans. Given that several of the factors hitting the share price seem to be outside of Glanbia's control, it is hard to say just what way things will go.

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The impact of trade wars on global markets has more to do with Donald Trump than Talbot. Fear about an economic slowdown in the US is also a major macro factor, as is the weakening sentiment toward stock markets, especially in Ireland and the UK, given all of the Brexit uncertainty.

But disappointing numbers back in July for its performance nutrition division may be something management can work on. Changes in consumer behaviour and growing competition seem to be factors.

The CEO came up against some resistance to her remuneration package back in the spring, with 22pc of shareholder votes cast against it. That figure is sizeable enough, as was last year's remuneration, at €2.3m.

That was back in March, when Glanbia's share price was trading at €18.98. It hit €9.78 last Wednesday. The Glanbia Co-op is the big loser here, on paper at least, as are many suppliers who are sitting on some of the shares directly. The co-op's stake is down around €900m in value since March.

Nevertheless, Glanbia remains a very strong business, with solid positions in growth segments and growth markets.

The warning on earnings in July was probably the first blip that has been witnessed in performance by Talbot since she took over.

But how the market has punished the stock. Kerry Group shares are up around 15pc since March and the ISEQ is down around 7pc since then, while Glanbia is down nearly 48pc. It has shed around €2.6bn in market capitalisation.

Aside from executive incentive share plans, the top four executives held around 607,000 shares, which were valued at €11.5m in March. That has now fallen to €5.9m.

Banana plant fungus could prove tricky for Total Produce

Total Produce chairman Carl McCann had reason to be pleased with the group's first-half results when he announced them on Thursday. This was the first full year of results since Total Produce took a 45pc stake in US fruit distributor Dole.

The figures shone like a juicy red apple - revenue up 39pc to €3bn; adjusted ebitda up 106pc to €117m, and an interim dividend of 0.9c per share.

The Dole deal has enlarged the group significantly, and the results are starting to come through reflecting that. Total Produce has an option to increase its stake in Dole in the years ahead and can purchase the rest of the group within five years of the original investment, which was in 2018. The Dole deal brought Total Produce back to its roots in bananas, as the American company sells around 140 million boxes of them in the US, and the typical yellow Cavendish banana generates roughly 40pc of sales.

But, longer-term, there could be a tricky battle to deal with when it comes to the humble Cavendish banana. A fungal disease called Panama Disease TR4 has been very detrimental to the banana plant in Asia.

It is harmless to humans but undermines the crop over time and can knock it out entirely. Panama Disease TR4 has arrived in Latin America for the first time.

In late August, it was detected in Colombia, where the industry there has now declared a state of emergency.

Containment and treatment will be major battles to stop the spread to other major Latin American exporters like Ecuador.

If it were to spread over time, it would pose a major, if not existential, threat to the banana plant as we know it. But this isn't actually new. It has happened before.

The previously popular banana type known as 'Big Mike' was wiped out in the 1960s by a similar fungal issue. But the industry responded by developing new varieties and eventually settled on the Cavendish, which today makes up 99pc of the world banana export market.

The industry will try to develop palatable new alternative varieties while also containing the spread of Panama Disease TR4. The question is how quickly could this spread and how quickly might the palate of consumers around the world get used to and enjoy a new variety, if the Cavendish's days are actually numbered?

At the very least, tackling the problem will cost money. Either way, it could prove quite the banana skin for the industry.

Cairn cashes in after RTÉ deal

Back in the heady, crazy days of the property boom, taxi drivers were buying two or three apartments off the plans, before they were even built. Now, single buyers are buying hundreds of apartments before they are built. Cairn Homes announced another deal to sell an entire apartment block to one buyer this week. Cairn agreed to sell a 282-apartment complex to Urbeo for €94m at Citywest. This works out at an average price of €333,000 per apartment.

Urbeo said it hopes to do similar deals in the future, including with the likes of Cairn.

So it could be the same again at the RTÉ site acquired by Cairn Homes in 2017.

It was confirmed this week that Cairn plans to build more apartments at its RTÉ site than it had originally envisaged. Instead of building about 500 apartments, it will opt for 105 more, and go for 605.

For Cairn, it makes sense to find a buyer before completing the build, and it seems there are plenty of them out there.

Cairn sold its Six Hanover Quay development of 120 apartments for €101m, or €800,000 each. At the time, it was reported that Cairn had bought the site for around €20m and spent €40m on the build, thereby bagging a very sizeable profit.

Rents at Hanover Quay are around €3,700 per month for a two-bed. As long as rents hold up, institutional buyers can deliver a very fine profit to the developer, while still making a good return themselves.

Back in 2017, when Cairn bought the RTÉ site, chief executive Michael Stanley said: "Cairn is delighted to have acquired what we believe to be Dublin's most attractive residential development site.

"At Cairn, we believe in building exceptional homes in great locations and the Montrose site will significantly add to the new homes we will bring to the market over the coming years."

Surely it will prove very tempting for Cairn to sell the RTÉ development to a single buyer too, given the returns it has delivered so far. It takes some risk out of it for the developer, and who needs the hassle of setting up a marketing office, sales team and different legal fees per purchase?

No doubt, the homes will be very attractive when they are built, even if there are over 100 more of them than originally envisaged. If Cairn goes down the build-to-rent route there too, it will be a pity that only one buyer will end up owning them.

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