Brokers bet on food groups to buck the trend

LAST year’s deal that resulted in the merger of IAWS and Swiss bakery group, Hiestand into one of the largest bakers in the world, Aryzta, has won many plaudits.

The €2.5 billion deal was recently voted the best transaction of 2008. In a poll, half of the brokers surveyed named it deal of the year.

It was no surprise that Owen Killian, the brains behind the merger and now boss of the enlarged group, was also voted the chief executive of 2008 in a Sunday newspaper poll.

It must be a source of enormous satisfaction to Killian that he beat Michael O’Leary, the much brasher boss of Ryanair, for the top accolade.

Never were two management styles so different.

Substance, not style, is what counts in the end, and Killian, who snared Hiestand in mid-2008, had been working behind the scenes for some time to pull the entire package together. What matters now is that the combined entity delivers in the years ahead.

Glanbia’s $315m (€230m) acquisition of Optimum Nutrition also caught the imagination of brokers last year.

That deal gave the group access to a market unlikely to suffer too much in the downturn.

In recessionary times, defensive stocks such as food are always regarded as a good bet when other sectors are struggling. People have to eat and, even if there are cutbacks with less sales and earnings, the fall tends to be less severe than in other shares.

One of the country’s leading brokers has chosen a number of food companies among its top share choices as we move into a very uncertain market.

In it analysis, Davy Research points out that many Irish firms have established international track records, underpinned by strong balance sheets and good earnings’ prospects relative to their international peers in the current difficult operating environment.

Among its top seven picks for 2009, the brokers tip Kerry Group and Glanbia as the food shares to do well.

While Aryzta is mentioned in dispatches it did not make it into the top tier. That’s not to take from what Owen Killian has achieved. It will, however, take time for him to pump up the group’s combined potential.

Given its geographic spread, with operating bases that stretch from Europe to Japan and Australia, it will be a demanding challenge.

It is also the case that the market for discretionary treats such as croissants and doughnuts will leave Aryzta vulnerable over this uncertain period, as consumers become more conscious of how they spend their dwindling cash.

Nevertheless, this group has huge potential, even if the share price is well off the high it achieved shortly after the deal was done.

In 2008 European and US food stocks were seen as one of the few safe havens in 2008, outperforming their respective markets by 33% and 37%.

By comparison, the Irish food and beverage aggregate fell 45.8% in 2008, hurt by the awful performance of the Irish stock market — down 66% on the year.

Aryzta was down 23.6% and Kerry fell 39.6%, making them the best-performing stocks in their category.

Glanbia, which fell 54%, has been elevated to a food stock choice for 2009, reflecting the way the group has redefined itself in the past few years.

The focus on nutritionals is beginning to pay dividends, giving the group a strong second string to its bow, behind its local and international dairy business.

Kerry Group remains solid having resisted the lure of expensive takeover deals over the past few years.

It has become more cost efficient and is still regarded as the beacon for the rest of the Irish food sector to follow, even if the group is less exciting than it was in times past.