Aryzta shares dive on profit warning

Shares in Cuisine de France owner Aryzta have plunged up to 21% after it issued a profit warning, saying full-year earnings will likely fall by around 20%, writes Geoff Percival.

The Irish-Swiss baked goods firm had expected earnings, on an earnings before interest, tax, depreciation, and amortisation basis, for the 12 months to the end of July to be in line with the previous year at around €420m.

However, its update suggests a total for the year of about €335m. It also said it expects to achieve more than €450m from non-core asset disposals by the end of July.

Those disposals include the recent sale of LaRousse Foods to Musgrave Group, its under-performing Cloverhill bakery business in the US and various joint-venture investments. They form part of a four-year €1bn deleveraging target, which is understood to be well advanced.

Goodbody analyst Jason Molins said the announcement represented another disappointment for Aryzta, with the current financial year marking the fourth consecutive year of earnings downgrades for the company.

“We are likely to lower fiscal year 2018 earnings per share forecasts by around 40% to reflect the update. Assuming the company can achieve its stated disposal target, we estimate 2018 net debt/ earnings before interest, tax, depreciation, and amortisation would be around three times, which compares to a covenant threshold of four times,” he said. Aryzta said it remains confident of avoiding breaching its banking covenants.

“Europe accounts for roughly 4% of the 20% downgrade. Despite improving key performance indicators in the group’s new Germany facility, this has been insufficient to offset the lost volume from the insourcing of production by the co-op in Switzerland and Brexit- related pressures, which continue to weigh on the group’s UK business,” said Molins.

While Aryzta said it is doing well outside the US and the UK, it said rising distribution costs and high labour costs are slowing US recovery.

“Operational instability has plagued Aryzta for well over two years. [This] warning signals an intensification of operational challenges in north America.

“We believe operational headwinds amplify the requirement for non-core asset disposals. Renewed cost pressures present a significant hurdle to the timing of management’s profit recovery ambitions; however, the broad thrust of new strategy remains in place,” Davy analysts said.