Origin looks to its track record as a consolidator for future growth

It’s a little more than a decade since Origin Enterprises first listed on the Irish and London stock exchanges, but the business has evolved considerably in that time. To understand Origin today, it helps to recount where the business has come from and how it has evolved.

The Origin Enterprises of today is a much more streamlined and sector-focused company than the one that started out life in 2006.

Back then, Origin was an assortment of businesses banded together under one name with operations in everything from importing and blending fertiliser to making animal feed and fish meal, as well as owning a wholefoods division with household brands such as Erin, Roma, Batchelors and even Odlums flour.

However, the company was a product of its heritage. Origin was originally established as a subsidiary company of the Irish Agricultural Wholesale Society (IAWS), an entity which no longer exists today but traded for over 100 years having been set up as the wholesale supplier of chemicals and fertilisers to the Irish co-ops.

In the early 2000s, IAWS was increasingly diversifying into the fresh food sector, having snapped up the Cuisine de France brand, and it needed to create a new entity to spin-off its legacy businesses.

Origin was that company and it listed on the Dublin and London stock exchanges in May 2007, with IAWS placing 32% of the shares in the company on the market.

IAWS, which eventually merged with a Swiss bakery company to become Aryzta, continued to hold 68% of the shares in Origin up to 2015, when the group sold its stake in the business to a host of institutional investors and investment funds.

These institutional investors, including Setanta Asset Management, FMR, Artemis and Invesco, remain the largest shareholders in Origin today. Almost 50% of the company is now owned by just six institutional investment companies. Not only has the investor profile in Origin evolved significantly over recent years, but so too has the business itself.

Tom O’Mahony, who has been chief executive at Origin since its creation (coming from IAWS), has steadily streamlined the business over the years into a company that is solely focused on providing agri-services to farms, including specialist agronomy and advice services, crop inputs, and more recently digital or precision agri-services.

Over the last decade, O’Mahony has repositioned the business and brought it back to its farmer-facing roots by divesting the company’s interests in consumer foods, flour milling and marine proteins.

Today, Origin has operations in Ireland, the UK, Belgium, Poland, Romania, Ukraine and most recently Brazil. The group has significant scale and deals with about 50,000 farmer customers every year across these countries, who farm a combined 13m to 14m hectares of land.

Because of the variation in each of the countries in which it operates, Origin has adopted a decentralised business model where separate business units are run by local management teams in each country. This allows Origin to take a tailored approach in each country and develop a local knowledge of the supply chains in each market.

While Origin’s business is still heavily weighted to the UK and Ireland, with 75% of operating profits coming from here, the group has been slowly planting the seeds to develop a more geographically diversified business.

Since 2015, Origin has acquired businesses in Belgium, Ukraine, Poland, Romania and most recently in Brazil, where the group made its first foray into South America.

Origin remains a company that is very lowly borrowed and has an earnings to net debt ratio of just 0.54 times

While still in its early stages, Origin is adopting a buy-and-build approach to new territories with the view to establishing the company as the market leader in each market over time. This strategy has worked for Origin in the UK, where its subsidiary business known as Agrii is a market leader and the result of 30 years of merging and rebranding of individual companies including Dalgety, Masstock, CSC crop protection and UAP under a single entity.

Cautious

However, given the political and economic situation in some of these emerging markets, Origin has been cautious about how rapidly it deploys capital in these countries.

Origin’s buy-and-build approach has given it a foothold in major grain-producing countries such as Poland, Ukraine and Romania, where the group now has a market share of roughly 10% in each market where crop input and agronomy services are highly fragmented.

Origin sees itself as the consolidator in each of these emerging markets, meaning its investments to date are part of a steady, long-term strategy.

The most recent step in this strategy came in June this year, when Origin made its first move into South America by acquiring a 65% stake in Brazilian company Fortgreen Commercial Agricol for €41m.

In time, Origin will acquire the remaining 35% stake of Fortgreen, which has annual sales of €28m and profits (EBITDA) of €9m, meaning the business is extremely profitable with an earnings margin of 33%.

For Origin, the high profit margins in the Fortgreen business make it a worthwhile acquisition given the risks of entering the Brazilian market such as currency translation, interest rates, as well as the political situation.

The fact that Origin spent four years assessing the market in Brazil in order to find a suitable business to acquire as an entry point to what is a vast and growing agricultural market that remains highly fragmented in terms of agri-service providers, should ease investor concerns about the risks of Brazil.

Lowly borrowed

Despite the recent acquisitions, Origin remains a company that is very lowly borrowed and has an earnings to net debt ratio of just 0.54 times. The company continues to pay out a healthy dividend to investors, with a final dividend of 21c per share announced this week.

Origin is a strong generator of cash, with cashflows of €57m last year. The dividend policy, where typically 45% of cash is paid out on an annual basis, demonstrates to investors the robust cash returns generated by the business, while still allowing for investment and acquisition.

Despite the attractive dividend policy, Origin is a plc with very few typical retail investors. Even the Irish co-ops have little or no investment in Origin today despite it being formed out of IAWS.

Some might say that Origin and its decentralised businesses model in farm inputs and agronomy is a difficult sell. It is more likely that to a city stockbroker it is difficult to find a comparator.

Weather

Ultimately, weather and its impact on farming plays a major factor in determining the quarterly profits of the group. For that reason, Origin has always been a long-term play. Its recent spate of expansion may be a prudent and well-practiced approach of buy and build in growing the business in emerging markets. But it does carry risk in these markets.

All that said, Origin has a proven track record as a consolidator and clearly intends to replicate this strategy in its emerging markets. This will not be attained overnight.

As a plc, Origin needs to deliver growth for shareholders. Organic profit growth is limited in existing businesses, therefore it will most likely come from acquisitions. As a result, returns on capital will be key. Overall, Origin has the capability and credentials as a consolidator and its history shows it can continue to do this.