Kerry Group could have the ability to spend over €1bn on acquisitions this year, according to analysts, despite earnings likely to be hit by Brexit-related currency headwinds.
Transactional exposure to Brexit is expected to result in a 3% hit to Kerry’s 2018 adjusted earnings per share.
Despite more than a €50m fall, the Tralee, Co Kerry-headquartered food and ingredients group generated just over €500m in cash in 2017 and closed the year with net debt of just 1.56 times earnings.
In a wide-ranging report on Kerry, Investec said it expects the food group to generate over €537m in free cashflow in 2018. Kerry spent €400m on eight acquisitions last year and has already spent another €80m on deals in Asia and Africa this year.
At its recent annual results presentation, Kerry’s chief executive Edmond Scanlon said the group will continue to buy companies.
“The acquisition pipeline remains strong. With the market fragmenting there will be many opportunities for consolidation and we’re confident we can lead the way in that consolidation,” he said last month.
Kerry’s net debt is expected to tick down to about 1.18 times earnings this year. However, Investec said if management was to stretch its balance sheet to where debt was two times to 2.5 times earnings, it could generate €783.4m to €1.26bn in debt-funded capital for further growth.
“This is over and above the €250m we have pencilled in for maintenance and expansionary capital expenditure and the €121.7m forecast for dividend payments, which assumes 10% dividend growth this year,” said Investec analyst Ian Hunter.
“If the monies generated were used to fund acquisitions, at current multiples, this could boost [Kerry’s] 2019 adjusted earnings per share by 3.5% to 5.6%. Given the current low cost of capital, it will take little post-acquisition growth to cover the cost of capital,” said Mr Hunter.
Kerry’s share price was down nearly 4% yesterday, hovering around €80.
However, Investec has upped its price target for the stock from €93.75 to €100 for the next year.
Kerry last month reported a strong set of 2017 figures. However, investors were disappointed with the earnings per share outlook of 6% to 10% growth for this year especially versus the previous 10%+ medium term growth target communicated by management.
“We believe management did not make it clear ... that this incorporated the 3% transactional hit. Stripping that out would give a constant currency adjusted earnings per share growth forecast of 9% to 13% for 2018,” said Mr Hunter.