Food market still promising good returns
However, relative to its EU and US peers, the sector has been undervalued as well as the banking and construction sectors and actually offers good value going forward. The same argument has been made for the banks and other sectors that have been de-rated in the past six months on fears of a collapse in the Irish economy following the housing slowdown.
Since mid-2007 Irish stocks generally have been marked down in price relative to other markets.
But even if it looks like the end of the world with last Monday’s share rout the worst since the aftermath of 9/11, the basic business Irish food groups strategically positioning themselves for further growth domestically and internationally will continue, irrespective of global stock market turbulence.
The restrictions on the availability of cash, already in evidence since the credit crunch that started in the US in August, could be positive for Irish firms seeking to expand by acquisition.
In the past, some have complained that hedge funds and others with access to cheap cash over the past few years have paid better than the odds for food and other companies, in order to asset-strip them and sell them on in a few years.
That party is coming to an end and by the time the US cleans up the subprime mess, lending conditions will be tighter and funds obliged to declare the level of risk in investments they offer clients.
It seems reasonable to see the likes of Kerry, Glanbia and others to start a more aggressive round of acquisitions in the years ahead that will be earnings-enhancing.
Add to that the current low cost of buying into Irish food stocks and the returns could be good in the coming years.
Moves are afoot showing the Irish meat sector is starting to rationalise. Glanbia has announced it is selling its pig-processing division to focus on its core activities of a broad range of dairy foods and its ingredients business.
It took Glanbia years to get to this point, however, and shareholders faced massive write-offs as the mistakes of earlier times were dealt with — a big move given the group controls 50% of the Irish pig kill.
Kerry looks to be on the verge of buying the consumer foods division of Breeo Foods, part of Reox Holdings, spun out from Dairygold to represent the co-op’s non-dairy processing activities.
The price is understood to be in the region of€170 million and involves the acquisition of such brands as Galtee, Calvita and other lines synonymous with Dairygold.
The sale is further testimony that the Irish food processors are rationalising as the need for cost control and better margins become more pressing.
It shows Irish food and dairy companies are not standing still and it would be interesting to see what use Reox makes of the money it acquires from the sale.
However, the big news this week was yesterday’s announcement from Origin, 75%-owned by IAWS, that it has paid £26.3m (€35.2m) for the acquisition of the Masstock Group in Britain with a furtherpotential £10m based on profit targets being delivered on and £30m in debt.
The move is good news for both Origin and IAWS and provides further evidence that Irish food groups intend to grow and expand in order to enhance shareholder value, even if the markets are failing to acknowledge that at present.
Another plus point for the Irish food sector right now is that when markets areunder pressure food stocks are always regarded as defensive because no mater how bad things are, people have to eat.
