In its latest financial results published last week, Kerry Group said it expected its full-year earnings to be “at the low end” of previously stated guidance.
With both volumes and margins slightly higher at the Taste and Nutrition division – which accounts for the vast majority of Kerry’s business these days – it is the Dairy Ireland division which is increasingly becoming a drag on the group’s performance.
In comments accompanying the announcement of the third-quarter performance, chief executive officer Edmond Scanlon said: “Taste and Nutrition remains strongly positioned for volume growth and margin expansion while recognising current market conditions, however, Dairy Ireland performance continues to be impacted by challenging industry dynamics.”
This set of results is the first, since Kerry started reporting Dairy Ireland separately, in which that division’s share of revenue has fallen below 20% of the group’s total revenue.
Furthermore, the profitability of Dairy Ireland continues to fall, with the EBITDA Margin (a measure of how much money the company makes from what it sells) dropping since at least the start of 2021.
At 4.3%, it is considerably below the 14.8% margin made in the Taste and Nutrition division (see Figure 1).
Within the Dairy Ireland division, both the drop in volumes and prices accelerated significantly in the three months to the end of September, with the dairy ingredients business particularly badly hit due to what Kerry called “softer market dynamics”.
The company did say that consumer products continued to perform well with growth in branded cheese and private label spreads.
For the wider Irish dairy industry, there can be some ‘read across’ from the performance of Dairy Ireland.
As the only major processor with a stock market listing, it updates its performance much more regularly than the co-operative sector does, giving a window into how the overall market is doing.
It should come as no surprise that the processor sector is under pressure, but the speed of the decline in both value and volumes at Dairy Ireland could mean that the wider co-operative sector may be suffering more than expected.
A turnaround in the global dairy market is obviously the best cure for any problems – and there are some signs that may be on the cards for 2024 – and relatively strong cash balances in the sector at the start of this year should provide some cushion for processors.
However, it is unlikely there will be much good news in co-operative annual results when they start to report early next year.
Falling share price
Despite the continued strong performance of the Taste and Nutrition division, which makes up more than 80% of Kerry’s revenue, the group’s share price is really struggling.
In the past two years, it has dropped by more than a third (see Figure 2), as investors remain uninterested in the company.
While we can point to the underperformance of Dairy Ireland as a worry in this country, the overall returns and outlook for the group do seem stronger than the collapsing share price would suggest.
This fall in the value of shares is clearly becoming an increasing concern for the board of the company, as when they released the third-quarter trading update, they also announced a €300m share buyback scheme to commence “at the beginning of November”.
That announcement did give a brief bounce to the price of shares traded in Dublin, but that quickly faded again to see the company trade close to €70 a share, the lowest level since early 2017.
This drop in the share price is obviously bad news for shareholders in the group, none more so than for Kerry Co-op. The co-op’s balance sheet is almost entirely made up of the just-over-11% stake it holds in Kerry Group.
At a share price of €72.50, Kerry Co-op’s share of Kerry Group is worth approximately €1.45bn. At the start of 2021, the co-op’s shares were valued at €2.53bn.
Even allowing for the small number of disposals in the interim, the co-op has lost €1bn in less than three years on its Kerry Group shares.
It is easy to point to the struggles at Dairy Ireland as a problem for Kerry Group, but that alone cannot explain the group’s dismal share performance.
As we have already said, the Taste and Nutrition division makes up the lion’s share of the company’s revenues and remains highly profitable. On the face of it, Kerry’s share price should be considerably higher.
However, this does not take account of the most esoteric and – probably most important – thing in the world of financial investment: sentiment.
Kerry is a victim of several things, some of them of its own making. Despite the strong diversification of the group, it is still fundamentally seen as an Irish food company.
The Dairy division may not make up a huge proportion of the group’s revenue or profit, but it makes up an outsize share of investor perception of what the group does.
With the dairy market in the doldrums, this is weighing on the company’s share price.
The co-op has lost €1bn in less than three years on its Kerry Group shares
After all, who wants to increase their exposure to dairy when the market remains in the doghouse?
The thing is, investor perception is a problem that Kerry Group should be working hard to solve.
However, there is little sign the company has any interest at all in talking to the wider investment universe.
It stopped doing media briefings during the pandemic – and hasn't restarted them since. While they still are doing earnings calls, these get little wider coverage due to how media-averse the company is.
This is a missed opportunity to speak directly to investors and the wider public.
It also means that Kerry is in a position where it has to show, rather than tell. That means a significant turnaround in the share price can only be driven by a very strong trading performance, or by giving a firm message to investors that it no longer is an Irish dairy company.
The obvious way for that to happen is to follow the Glanbia/Tirlán model. There are myriad problems with the co-op voting to approve that.
But, for Kerry Group, there may be much better prospects for the group in offloading Dairy Ireland at any price, rather than continuing to hold onto an asset that seems to be increasingly becoming a liability for the value of the group as a whole.
An earlier version of this article stated that Kerry had stopped doing earnings calls, which continue, rather than the media briefings which ended during the pandemic.