NCB Stockbrokers upgrades share price target for Kerry Group to €43

NCB Stockbrokers have increased their share price target for Kerry Group to €43 following a note to clients headed “Kerry surprises again”.

The NCB note released yesterday said the upgrade comes on the back of stronger-than-expected results in the first six months of the year.

Last week Kerry Group reported a 10% rise in sales to €2.9bn with pre-tax profits rising by 13.7% to €208.6m from €183.4m, for the six months to the end of June.

“Having passed the half-year stage, we also roll forward our sum-of-the-parts valuation to FY13 [financial year 2013]. We believe Kerry Group is now viewed almost entirely as an ingredients and flavours company with its consumer foods business contributing just c 20% of group EBITA (earnings before interest, taxes and amortisation) and producing steady profits despite the current trading environment,” analyst Darren Greenfield said.

Mr Green said the first-half results were about 7% better than expected at an earnings per share level.

“The out-performance versus our expectations came from higher-than-expected margins in ingredients and flavours (+40bps) and consumer foods (+30bps) and a lower-than-expected interest charge (€28m versus €31m forecast).

“The out-performance in ingredients and flavours appears to have been mainly from the phasing of a €10m maintenance cost which was shifted from H1[first half of the year] to H2. Consumer foods’ out-performance was due in part to the exit of low margin and loss-making contracts, particularly in frozen food.”

Mr Greenfield said the €200m (c €240m pre tax) exceptional charge for integration and restructuring is a significant new charge.

“It is likely that there will be more exceptional restructuring and integration costs going forward as Kerry continues its strategy of acquisitions, c €250m of which are expected in H2 following a very quiet H1 on the acquisition front.”

Mr Greenfield said Kerry management is confident that volume growth will accelerate in the second half of the year following 1.3% growth in the first half.

“Kerry has good visibility on new product launches and sees a strong pipeline in H2. Volumes are also dependent on the customer’s volumes with major customers [Nestle, Unilever] reporting encouraging figures. We forecast 2.2% volume growth in H2. Raw material cost increases are not expected to impact H2 but may impact early 2013 if they remain elevated. Given Kerry’s pricing agreements, the impact is less likely to be on margins than volumes as consumers pare back purchases in response to price increases,” he said.

NCB increased 2013 and 2014 earnings per share by 1% and 3% respectively.

“We have increased our FY12E net debt by €95m to €1.18bn (1.7x EBITDA) due to higher-than-expected working capital, capex and fx impact. We value Kerry Group on a sum-of-the-parts basis. We value the ingredients and flavours business on 11.3x EBITDA and the consumer foods business on 8.4x EBITDA in line with peers.

“Our €43 price target represents 16.4x our FY13E earnings, which compares to c 17x for the Ingredients and flavours sector,” said Mr Greenfield.


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