Agri-food industry reaping the rewards

Some serious wealth is being created within the Irish agri-food industry in a very short period of time, writes Joe Gill.

In particular, those companies quoted on the Irish stock market have experienced a surge in value over the last three months. Glanbia, for example, has seen its share price rise by 37% since December 1. That means it has added €1.3bn to the value of the business.

Kerry Group is 8% higher than three months ago, and is now valued at €11.3bn. Greencore is worth £1.4bn, 14% more than in early December. Origin Enterprises is valued at €1.1bn, having added 7% to its market capitalisation in just one quarter.

Who should we attribute those gains to? Mario Draghi is one person to whom Irish farmers may want to send a bottle of champagne. The unfolding of a large QE programme by the European Central Bank is creating huge amounts of liquidity while pushing down interest rates close to zero. That is driving institutional investors to shift money out of bond and deposit accounts towards equities.

The princes of Saudi Arabia are another target for cases of bubbly. The sharp reduction in oil prices over the past year has forced asset managers to reduce exposures to energy indices worldwide.

This has led to large amounts of money in search of sectors that offer reliable cash generation and defensive type attributes, something agri-food tends to offer.

Another factor in Europe has been the strength of the US dollar compared to the euro. For companies with large operations in the US in particular this FX move is creating positive effects on profits when they are translated into euro.

That dynamic has helped companies with large North American exposures, including Kerry and Glanbia. The inflation of multiples across the agri-food sector on global stock markets has also been an input to hefty share price advances.

In February 2010, for example, the four named Irish agri-food companies had an average PER of 11.5x. Today that stands at 19.5x. Using EV/EBITDA as the valuation measure, the multiple has increased from 8.5x to 14.4x.

This shift is probably due to QE and a raging bull market in equities. It has brought valuations to levels I have not witnessed over the last 20 years. The companies themselves have also played a role in this robust share-price performance.

Strong results and evidence of solid cashflow generation and growth has led investors to back the management teams that lead these companies. For farmers who are shareholders in the co-ops that remain significant investors in these agri-food plcs the financial gains are considerable.

Since December 1 alone, the value of the co-ops’ holdings in Glanbia and Kerry has mushroomed to €3.7bn. In total, the co-op in Kerry now has a shareholding in the plc worth €1.6bn while Glanbia co-op’s shares in the stockmarket listed business is valued at €2.1bn.

This value creation is a direct result of farmers in these areas having the foresight to create co-op/plc corporate structures in the 1980s and 1990s. This raises the thorny debate about what is the optimal corporate structure for farmer involvement in the agri-food sector. Some strongly advocate the traditional co-operative business model as the best way to balance the needs of farmers and the requirements of the processor.

That, however, almost guarantees that the equity in those co-ops will not ever generate the type of returns evident in businesses like Glanbia and Kerry.

By enabling growth on international markets in high margin sectors that are entirely detached from the Irish dairy industry, these companies have created tremendous wealth for all shareholders. Farmers, via their co-ops, have been the primary beneficiaries of that strategy.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.

Joe Gill