Aryzta’s profit fall may reflect a market shift

THE setback suffered by food giant Aryzta in Britain and Ireland, where food sales fell in the first quarter of its financial year, is hardly a big surprise.

Both economies are in deep trouble and the group is not unique in that sense.

Supermarket giant Tesco has just reported a halving of its British sales growth in its third quarter to the end of November after like-for-like sales grew 2%.

That 2% figure for the 13 weeks to November 22 was down from the 4% reported in the previous three months, and highlights the growing caution of consumers as economic worries impact on their spending.

Aryzta, formed last August out of the merger of IAWS plc and Swiss group Hiestand, then looked to have the world at its feet.

But the dramatic shift in sentiment in the meantime suggests the hoped for boost to the combined businesses will take longer to deliver previously thought.

Last week NCB Stockbrokers, who are not given to overstatement, cut their forecasts for 2009 for the group. Sales will grow just 4% it now predicts compared with its previous estimate of 10%. It reckons sales for the group in Britain and Ireland will be down by 10% and it is blaming the recession in both economies for that decline.

Luckily the US operations, which account for about 25% of earnings, grew by a little less than 20% in the first quarter, but the broker suggests both the European and US operations will grow only moderately in 2009.

Those projections may partly explain the drift in the share price. Aryzta’s share price has suffered badly since its flotation and is off nearly 50%, challenging a view expressed here in the past that food stocks are normally a good hedge in recessionary times.

Compared to the banks that is still true, but some of us would have expected the new group to hold up better given the track record of both firms and their potential to generate more business collectively than separately.

However news yesterday that the US economy has been in recession since last December will probably add to the group’s woes in the short term as concerns grow that it will not move out of recession for at least another six months.

The other bit of bad news facing the group is the threat that the 8% of the group controlled by Lion Capital could be sold off at any time, a move that would hurt the shares further in the short term if Lyndon Lea was to sell his holding.

Lea controls Lion Capital and resigned from the board of Aryzta in early November, raising speculation that he may be about to sell off his stake in the business.

That’s most of the negatives out of the way, but there is one other concern.

One of the difficulties for the group is that the range of par baked or frozen goods it provides to retail outlets and others are discretionary buys in lots of cases.

People do not need croissants or scones or finger food to get them though their day and when push comes to shove, as it has done in Britain and Ireland, less product is moving off the shelves.

For the IAWS wing of the business, this is the first time the group has been confronted with an economic slowdown.

Its food-to-go range melded beautifully with a fast-moving lifestyle where the kind of treats offered by Cuisine de France and its sister companies were perfect for the emerging lifestyles of an economy on the move.

Now that we are not moving quite as fast, the group may look like it could be forced to mark time over the next 12 to 18 months.

This however is a €30 billion market growing globally by between 4 to 5% per annum at the last estimate.

Combined, the two groups have quite a broad reach globally that should offer protection during this fallow period.

However few would have imagined the share price would have weakened to the extent it has and Aryzta boss Owen Killian, who engineered the merger with Hiestand, faces a pretty challenging time ahead.

Davy Research, brokers to the company, noted the group delivered good growth in Europe and the US in the first quarter and the underlying figures are consistent with earnings growth of 10% in the current year.

It also said the markdown in the shares was overdone.

That may be so, but it might be foolish to ignore the mood of the markets at this point in the cycle.

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