Starting out life as a small private dairy company in Ireland, dual-listed Kerry (KYGA) is now a leading player in the global food industry. Through its ‘taste and nutrition’ business – which accounts for more than 80 per cent of its revenue – the group provides flavourings and ingredients, such as emulsifiers, to the food and beverage markets. Its focus on natural products is tapping into the growing trend of ‘green consumerism’, whereby people are looking for more environmentally friendly and healthy food.
ESG favourite
Long-term food trends
Product innovation
Market-leading positions
Covid-19 uncertainty
Short-seller attack
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That comes as type 2 diabetes and high blood pressure become more significant global health concerns, placing pressure on food companies from both regulators and consumers to lower their sugar and salt content. Kerry’s ‘taste modulators’, are designed to do this without compromising taste, texture and colour. Its ‘TasteSense’ sweeteners reduce sugar content by up to 30 per cent and have the added benefit of being classed as a natural flavouring. As it seeks to advance its ‘clean label’ offerings (food products with simple ingredients that are easy for consumers to recognize and understand), the group ploughed €291m into research and development in 2019, up from €275m a year earlier.
This approach has captured the attention of Nordea Asset Management, which has Kerry as a top 10 holding in its Global Climate and Environment Fund (LU0348927095) and European Stars Equity Fund (LU1706108732). It views the group as a key enabler of the switch from artificial additives to natural substitutes. “Kerry has been one of the first movers in this area and now holds a leading position,” says Michaela Zhirova, an environmental, social and governance (ESG) analyst at Nordea. “This, together with a high investment in innovation, makes the company one of the best positioned to benefit from the rise in demand for more natural ingredients.”
Last year saw adjusted operating profit from ‘taste and nutrition’ increase by 14 per cent to €919m, with a 0.2 percentage point uptick in the margin to 15.3 per cent. The segment has been disrupted by Covid-19 – while volumes rose 1.2 per cent in the first quarter of 2020, the group estimates it would have achieved 4 per cent growth in the absence of the pandemic. The main weakness comes from the foodservice channel, which accounts for about 30 per cent of the division’s sales and caters to the out-of-home dining and on-the-go snacking markets. Considered a higher-growth area prior to this crisis, these outlets have been squeezed by lockdowns. Berenberg expects the taste and nutrition margin to dip to 14.6 per cent of sales this year before recovering in 2021.
The lower-margin consumer foods business has seen volatility, but should benefit from its market-leading positions, underpinned by a stable of well-known brands such as Richmond sausages.
Last year saw the group in the crosshairs of activist short-seller Shadowfall Capital. Among other things, it questioned whether Kerry was inflating its profitability, alleging that its acquisitions were “either lossmaking or generally low margin”.
It has spent more than €3bn since 2010. It made 11 purchases for €562m last year, but the company’s fans characterise these as canny bolt-on deals which Kerry can use its scale to create value from.
Excluding lease liabilities, the group finished 2019 with €1.9bn of net debt, up 15 per cent, with dividends and acquisitions outweighing free cash flow of €515m and equivalent to 1.8 times cash profits, which seems reasonable to us.
KERRY (KYGA) | |||||
ORD PRICE: | 10,990ȼ | MARKET VALUE: | €19bn | ||
TOUCH: | 10,970-11,010ȼ | 12-MONTH HIGH: | 12,650ȼ | LOW: | 8,850ȼ |
FORWARD DIVIDEND YIELD: | 0.9% | FORWARD PE RATIO: | 26 | ||
NET ASSET VALUE: | 2,585ȼ* | NET DEBT: | 45%** |
Year to 31 Dec | Turnover (€bn) | Pre-tax profit (€m)*** | Earnings per share (ȼ)*** | Dividend per share (ȼ) | |
2017 | 6.41 | 691 | 341 | 62.7 | |
2018 | 6.61 | 714 | 353 | 70.2 | |
2019 | 7.24 | 795 | 394 | 78.6 | |
2020*** | 7.23 | 753 | 371 | 86.4 | |
2021*** | 7.63 | 863 | 425 | 95.1 | |
% change | +6 | +15 | +15 | +10 | |
Beta: | 0.34 | ||||
*Includes intangible assets of €4.6bn, or 2,600ȼ a share | |||||
**Includes lease liabilities of €109m | |||||
***Berenberg forecasts, adjusted PTP and EPS figures | |||||
£1 = €1.12 |