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Kerry, organic growth pivotal to success

06-Nov-2003

Leading Irish food ingredients company Kerry brushed off currency fluctuations and testing market conditions to post a stable set of figures for the first six months of the year. The following paper from Irish stockbroker Goodbody takes a closer look at Kerry's past performance as well as opportunities for growth in the future.

Goodbody recently undertook a detailed analysis of the dynamics of Kerry's track record, with particular emphasis on the organic growth achieved.

 

"Since its introduction to the stockmarket in 1986, Kerry has produced the highest EPS and share price return of any food company globally, delivering growth of 17.6 per cent per annum and 20.3 per cent, per annum respectively. While acquisitions have played a pivotal role, transforming the company from a regional Irish based dairy products company to a food company whose product range spans the entire food chain, the performance was driven by management's ability to make the acquired entities perform better," the report said.

 

While the €2.2 billion spent on acquisitions since 1988 has played a critical role, it would not have been sufficient to generate the sort of earnings growth attained over the years, Goodbody's report continued. "An analysis of its historic performance suggests that organic growth (defined as growth other than the historic earnings acquired through acquisitions) was pivotal to its success.

 

"In other words, Kerry was able to add value to the companies it acquired as well as grow its existing businesses. Using this interpretation, organic growth, although it accounts for just one third of the total increases in operating profits over the years, accounts for at least 47 per cent of EPS growth and, arguably, virtually all of the earnings growth when cash flow related interest costs are taken into account."

 

Looking ahead, the report continued, with the general prognosis for sector-wide organic growth of low to mid-single digit, acquisitions will continue to be critical to Kerry's development.

 

"Our analyst , having mapped out the competitive environment, concluded that potential areas for acquisitions and mergers include existing competitors within the ingredients industry, especially in the flavours additive segment, expansion into new segments within Application Specific Ingredients or additives and, existing competitors within the UK food industry or food companies in sectors where Kerry might seek a presence.

 

"However, in order for acquisitions to make an impact on future growth, our model suggests that firstly the acquisition spend needs to be stepped up to over €300 million per year, and secondly, because of the rising costs of ingredient acquisitions in particular - to over two times sales - extracting additional growth from them will be more important than ever."

 

The report concluded: "On valuation, our analyst believes there's significant upside share price potential, as the stock trades on a multiple of 12.1x 04 earnings, which given Kerry's track record and proven ability is factoring in a lot of pessimism.

 

"According to our analyst's forecasts, Kerry is expected to deliver 10 per cent earnings growth - equivalent to c. 14 per cent before the negative impact of currency - this year and growth beyond that, dependent on acquisitions, over the next five years. On that basis, the current rating offers value and our analyst continues to rate the shares a 'Buy' with a €17.50 share price target."