Like Syngenta, Dublin-headquartered Origin Enterprises hopes to benefit from the need to drive crop yields higher with its work in the agricultural science of agronomy, but its share rating seems stuck in the past.
- Need to raise agricultural yields
- Scope for acquisitions
- Opportunities in Poland
- Difficult to deal in shares
- Cyclicality of farming
Stockbroker Goodbody estimates that agronomy will account for nearly two-thirds of Origin's operating profit this year. But the company is a relatively new entrant into the field via the acquisition of Masstock in 2008. Before that deal, designed to move Origin into higher-value work, the business had been around for more than a century, mostly as a part of Irish company IAWS, during which time it built itself into a leading UK and Irish supplier to farmers. The change in focus followed the merger of IAWS with baking giant ARYZTA, and Origin's demerger from the enlarged business in 2006. While the changes made since then should have turned Origin into a more attractive investment proposition, the share rating suggests investors haven't caught on.
| ORIGIN ENTERPRISES (OGN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 385¢ | MARKET VALUE: | €512m | |
| TOUCH: | 375-385¢ | 12-MONTH HIGH: | 405¢ | LOW: 295¢ |
| DIVIDEND YIELD: | 3.1% | PE RATIO: | 8 | |
| NET ASSET VALUE: | 151¢ | NET DEBT: | 97% | |
| Year to 31 Jul | Turnover (€bn) | Pre-tax profit (€m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 1.51 | -75.7 | -42.7 | 8.0 |
| 2010 | 1.08 | 44.5 | 27.1 | 9.0 |
| 2011 | 1.26 | 62.5 | 36.8 | 11.0 |
| 2012* | 1.18 | 69.6 | 44.4 | 11.3 |
| 2013* | 1.23 | 74.9 | 47.6 | 12.1 |
| % change | +4 | +8 | +7 | +7 |
Normal market size: 300 Market makers: 5 Beta: 0.3 £=€1.27 *Goodbody Stockbrokers forecasts (profits and earnings are not comparable with historic figures) | ||||
When Origin demerged from ARYZTA, which still owns a 71 per cent stake, its core business was fertiliser distribution; in addition it had - and has - associates operating in fish feed and fish oil, animal feeds and branded Irish grocery products. It is to this uninspiring but stable collection of interests that leading cereal-agronomy business Masstock was added, plus two smaller agronomy firms, UAP and Rigby Taylor, which operate in fruit and vegetables, and lawn care. These acquisitions provide Origin with opportunities to sell more fertiliser, but their main attraction is the growth potential of agronomy.
Origin's agronomy arm advises farmers how to improve crop yields and sells suitable products with a mark up to reflect the advice. As farms in the UK, Origin's main market, continue to consolidate there should be growing demand for this service. And, as increasingly sophisticated advice is required - due to factors such as regulation and climate change - market leaders, such as Origin, can expect to win market share. As the market develops there could be scope for Origin to increase its consultancy work, perhaps even become farm managers.
However, overseas expansion may offer the best opportunities. Initially, Origin is focused on eastern Europe, where there are many large farms but crop yields are low. According to Goodbody, in Origin's most established overseas market, Poland, about three times more land than in the UK is devoted to crop production yet yields are about half the UK's.
Given Origin's sound finances - year-end net debt is forecast to be the same as cash profits - overseas expansion could be aided by acquisition. Besides, Origin looks more likely to gain highly-profitable farm-management work in these less-developed markets, which have more potential to attract institutional investors than the mature UK market.
