Review of Irish agribusiness shares in 2018

In what was another traumatic year for Aryzta and after much controversy, shareholders narrowly approved a proposal to raise €800m in fresh capital in a bid to deliver a multi-year turnaround plan for the embattled bakery giant. Shareholders are now looking at a significant dilution of their shares. With the capital raise out of the way, management can now focus on turning the bakery around. It is forecasting growth in the mid to high single digits in its 2019 financial year. Labour cost inflation, particularly in its North American business, will continue to drag performance. It intends to use the cash injection to reduce net debts by €1bn over the next four years along with investing €150m in automation in its bakeries to drive out costs. The key focus will now turn to the operating model and whether the new management team can rebuild margins.

In a year which saw the board of the insurer conduct an independent investigation into internal allegations made against its chief executive, Fiona Muldoon, the main focus of the company was on the intentions of Canadian investor, Fairfax Holdings.

FBD ended up buying back and cancelling the €70m bond it secured three years ago, cancelling the risk of dilution for shareholders. To fund the buyback, FBD issued a new €50m bond.

With a line drawn in the sand over the Fairfax investment, it completes the three-year process of recapitalising the business and returning to pay a dividend.

FBD’s challenge will now be to grow in the face of increased competition that has entered a shrinking farm market.

That said, while competition is stronger, pricing is also stronger which has helped boost profits in an era of low investment returns. To grow it will have to focus on urban markets and a broader insurance offering. While this strategy sounds familiar to many shareholders who remember the No Nonsense brand, success will depend on better execution this time around.

Glanbia unveiled its largest ever acquisition in a $350m deal to acquire SlimFast the US-based weight management brand. This is the largest acquisition that Glanbia has ever made, eclipsing previous large deals for Optimum Nutrition ($315m) in 2008, BSN ($145m) in 2011 and Isopure ($153m) in 2014.

Glanbia sees the deal as a way to broaden its consumer base and move into new channels. The price tag seems cheap when compared with the $2.3bn price Unilever paid for it in 2000. However, since then, SlimFast sales have fallen by almost two-thirds and the profitability has plunged by more than 80% with margins falling from 20% to just over 11% today.

Given that these margins are lower than the 15% margins in Glanbia’s existing performance nutrition division, Slimfast has work to do not to drag margin performance in the division. Glanbia also has work to do in moving SlimFast away from its image of a sugary diet shake and drinks brand.

Over the last decade, we’ve seen how the performance nutrition business has been the engine that has driven growth year after year in Glanbia. It will be interesting to see if the latest punt on an ailing SlimFast brand can fuel further growth.

The convenience food company sold its entire US business during the year in a deal worth €930m. This came less than two years after Greencore signalled its intent to expand in the US market when it bought Peacock Foods. That transformative deal almost doubled the size of Greencore’s US operations. For 10 years, the US had been a difficult market for Greencore to crack, so the deal which valued the entire US business at a solid 13 times earnings seemed like the sensible approach.

When the dust settles, Greencore will be more than 40% smaller and solely focused on the UK market again. How Greencore navigates Brexit, as it depends on a strong UK economy and the free flow of people into the UK for much of its workforce, may limit its growth prospects in the years ahead.

Greencore CEO Patrick Coveney said said: “We will now focus all of our attention and resources on the significant growth opportunities that we see in the UK, both organic and inorganic. Despite the short-term uncertainties of Brexit, our scale, depth and expertise in attractive and structurally growing food categories mean that we are confident in the future growth prospects for Greencore.”

Kerry Group rounded out 2018 with the acquisition of two further businesses in the US for a combined €325m. This brings Kerry’s total spend on acquisitions in 2018 to over €800m, which is its highest spend since 2015 when it splashed out more than €1bn on a raft of acquisitions and bolt-on deals.

Kerry also shelled out €365m for Fleischmann’s Vinegar, an all-natural producer of speciality ingredients based in the US, and AATCO Food Industries, a culinary sauce company based in Oman. In the first half of 2018, Kerry Group invested just over €120m on four acquisitions and entered into a joint venture with Ojah, a Dutch company that manufacturers alternative meat products.

The two most recent acquisitions announced in the last week by Kerry will further extend the group’s reach in the food service sector, as well as enhancing its clean-label technology.

Kerry is on track to deliver profits (earnings) in excess of €1bn next year as sales head north of €7bn.

Impressively, Kerry is expanding its business without extending its debt to earnings ratio and is typically acquiring from its annual free cashflows.

During the year, Origin acquired a majority stake in Brazilian agri inputs and services company Fortgreen for €41m. As part of the deal, Origin acquired a 20% stake in Ferrari, a Brazilian business that provides agronomy services and crop inputs to grain farmers.

Having established itself as a leading player in Europe with operations in Ireland, the UK, Belgium, Poland, Romania and Ukraine, Origin sees opportunity in the vast and highly fragmented South American market. The move, where the production season is counter seasonal to Europe, should help to balance the seasonality in Origin’s earnings calendar. Origin has a proven track record as a consolidator. In the UK, Agrii is the result of 30 years of merging and rebranding of individual companies including Dalgety, Masstock, CSC Crop Protection and UAP under a single entity. Because of the variation in each of the countries it operates in, Origin has adopted a decentralised business model where separate business units are run by local management teams in each country.

However, given the political and economic situation in some of these emerging markets, caution is required. The company continues to pay out a healthy dividend to investors, demonstrating the strong cash generation in the business.

Typically, Origin has paid out 45% of its annual cashflows as dividends to shareholders, with the remainder of cashflows invested as capital into new and existing businesses.

The investment group saw weaker performance this year. A reduction in the availability of seed following lower than expected yields across Europe was a factor in this. The company’s dairy brand, Nomadic, is currently for sale but is seeing double-digit volume and sales growth in the UK and Irish markets. As a result of legislative changes, the group restructured its Brazilian seed potato operations and discontinued local growing activities. Following the sale of its shareholding in Monaghan Middlebrook Mushrooms, the group returned €45m to shareholders through a share buyback programme.