How are Irish agri-food companies performing?

Ireland’s main publicly traded companies such as Kerry Group (+4.7% ytd) and Glanbia (+2.6% ytd) have significantly outperformed the broader ISEQ Index to date in 2016 (-15% ytd). This is due to the defensive nature of their businesses, high visibility on earnings and the broad geographic diversification of revenues and earnings. Food companies with a more UK domestic-focused business such as Greencore, have fared worse due to concerns over immigration which could potentially impact its ability to maintain a stable workforce.

How is Brexit impacting equity markets?

The UK’s decision has led to increased political and economic uncertainty globally. However, equity markets have recovered strongly since the initial Brexit shock. The announcement of the new Prime Minister has supported investor sentiment and the pound.

Is there value at present in agri-food shares?

The defensive and non-cyclical nature of agri-food companies within a highly volatile and uncertain economic environment is extremely appealing to investors currently. Investors are willing to pay a premium. For example, Kerry currently trades at a 23.5% premium to its historical values while Glanbia is also trading high. Aryzta is currently trading at just 10.6 times earnings, which is at a significant valuation discount.

Has Cantor’s outlook on agrifood earnings changed because of Brexit?

Earnings of multinational food companies should grow roughly between 6-8% per annum over the next three to five years. Glanbia and Kerry should grow at a quicker pace (8%-10%). As 28% of Kerry’s revenues originate in the UK and 7% for Glanbia as both companies report in euro, the immediate potential impact of Brexit to earnings could come from a continued weakening in sterling. Greencore is the most exposed company to the UK, with 80% of revenues originating here.

Where do you see sterling/euro in medium term?

Sterling will remain under pressure over the medium term. If there is a further interest rate cut from the Bank of England over the coming months along with reduced economic activity, the euro could rally to 90p over the next six to 12 months, especially if economic data from the UK disappoints.

Will lower agri commodity prices drive earnings for food companies like Glanbia and Kerry?

Lower whey input prices have supported Glanbia’s performance division. However, cheaper cheese prices have affected revenues and profitability within its cheese manufacturing division overall. Lower input prices should remain a boon to Kerry’s operating margins.

What are the biggest risks right now for agri-food companies?

From an equity value perspective, if political and economic uncertainty diminishes over time, we may see a sector rotation out of defensive and non-cyclical companies into cyclical, cheaper valued stocks. However, this is unlikely in the near term. From an operational perspective, a recovery in input commodity prices could impact margins.