Glanbia shift to ingredients may be a big risk
It reckons by 2010 up to 40% of its profits could be generated by its ingredients operations against a mere 5% at this stage.
Already the analysis by Goodbody Stockbrokers as part of a comprehensive report on the Irish-quoted food sector suggests the Kilkenny based group is moving towards ratings with firms in the ingredients sector.
That does not mean to suggest the group is now firmly established in the tough sector that has been so effectively trawled by others in the past.
At this stage the brokers do not recommend investors to buy the stock preferring instead to give it a more anaemic “add” tag which I’m never quite sure what it means exactly.
Maybe some day the brokers will explain the subtle difference but let’s stay with Glanbia and its prospects.
One of the difficulties with 10-year reviews is they are no guarantee of what’s in store for the future. What can be said is that since John Maloney took over as boss of the group he has set about its transforming it.
While it is difficult to say with any certainty where its move into nutritional-based ingredients will lead it Goodbody Stockbrokers are certain a transformation is taking place.
Over the past five years in particular Glanbia has systematically pulled out of its operations in Britain at reasonable prices and rid itself of non -performing assets in the home market.
At this stage the group has moved in the direction of knowledge-based products in this rapidly evolving area of the food sector.
In the long term it is a very difficult area to evaluate. Whey ingredients have become the core drive of the strategic thinking of the group.
Over two years the group has plans to invest €100m in its US whey operations.
This is high return territory because of the core nature of the ingredients being produced and could push return on capital up to 17%.
If the programme is rolled out further then Glanbia could generate earnings per share (EPS) growth of 12.2% a year over the next five years.
In there are a lot of “ifs” and “buts” concerning the group but what is undeniable is the strategic shift that has taken place.
To an extent this is fraught with difficulties. If we look back the track record has been bad.
If bad executive decisions were the hallmark of what has gone before in both Avonmore and Waterford is there any reason to believe now that Glanbia will deliver the goods?
At the halfway mark profits will be down by about €2m. This is not the kind of out-turn to inspire confidence given the several years of serious losses resulting from the rationalisation process.
However, as Goodbody point out the dip in profits will be offset by good ongoing performance in the US from both cheese and whey activities.
What the group has to do going forward is to ensure it has enough research and distribution at its back to ensure it can derive as much return as possible from its US operations in particular.
Over the past 10 years the group has only achieved modest growth in sales up from €1,512m to €1,783, well under €300m.
That modest growth is due to the disposals in the past three years.
Of greater concern is that profits, earnings per share and the share performance have all been in the low to mid-single digit bracket over the 10 years from 1994 to 2004.
It could be a very big risk for the group going forward, but the determination of the current executive team to set out a new strategic landscape for Glanbia has to be respected.
Regrettably past performance is a guide to what investors can expect in the future. In that case the growth may not be as spectacular as the current changes might suggest.
