Liams Last Post : Aryzta and Origin both cautious , Market in brighter mood though..

Good Afternoon,

 

Well another week that looked as if it was starting in the same vein as last week, markets weak in Asia and a weak low key opening in Europe , the market looked weak , but it was a mark down rather than a sell off and the lack of selling which was a feature of the drift last week led to a rather quick reversal of fortunes. Volumes were light all day.

 

Aryzta reported results this morning , The strong EPS performance was driven by an impressive margin improvement in H2 2009 – Food Europe's EBITA margin expanded 150bps for the full year (160bps in H2) which was attributed to both the benefit from taking manufacturing in-house at the new Grangecastle facility in Dublin (management indicated the amount of product manufactured in-house for the ROI/UK market had expanded from 1/3 of the total to 2/3) as well as reduced overhead benefits accruing from the IAWS/Hiestand merger. We assume also that reduced input costs would have benefited in the current year. Interestingly, management steered away from guiding improvements in the annual margin for 2010 (despite the higher exit run rate) which may indicate that some of the H2 SG&A benefit is not sustainable on an ongoing basis.

 

Management was cautious on outlook, noting the declining sales growth levels across both European and North American food businesses. By our calculations the Q4 organic run rate was -7% in Food Europe and had slowed to 8.2% in North America (having been 16.6% in H1). Furthermore, management indicated that sales in FY2010 YTD were considerably behind the same time in FY2009 and they did not appear optimistic on an imminent pick up in consumer demand. Interestingly, they noted that the demand for the company's products was relatively price inelastic, driven more by consumer sentiment as the price of the products was small relative to the overall spend on food. This suggests to us that the company will look to sustain margin levels at the expense of driving volume. With the current levels of in-sourced production still below full capacity this is a viable strategy. However if volumes continue to decline we would expect that price will become more of an issue to maximise utilisation rates.  

 

Looking out to FY2010 it would appear to be a similar tale to H2 2009. The top line will decline in Europe and growth will slow in the US which will be offset by margin enhancement through a higher percentage of in-sourced production and reduced overhead. We now forecast a 4.2% revenue decline in Food Europe (assuming ROI stabilises to some degree; UK consumer declines further and European markets remain broadly flat), and a 2.3% revenue decline in the US (as the benefit from the Subway contract unwinds). Continued focus on cost control and in-sourcing provides FY margin enhancement of c.20bps in both the US and Europe. Factoring in our reduced EBITA forecast of €68.5m for Origin we arrive at adjusted EPS of 225.7 cent for FY2010. This is slightly above management's "guidance". Our forecasts assume average sterling FX of £0.92/euro and US$1.46/euro. At this stage of the year we regard these EPS forecasts as reasonable and not necessarily "low-balled".

 

Origin which is 71.8% owned by Aryzta also reported today. Origin issued full year results this morning. Adjusted EPS of 36.2 cent (representing 7% yoy growth) were ahead of our expectations of 34.8 cent. Revenue of €1,504m was 3.3% ahead of our forecasts due primarily to us assuming a larger component from marine proteins (which was consolidated up until February when the JV with Austevoll was consummated). EBITA of €75.7m was 5.7% ahead of our forecasts but EBIT plus JVs was 1.1% ahead at €76.1m (which accounts for our assumptions on the marine protein business - we had higher JV contribution and lower group EBITA). The previously announced write down in the value of development property in Cork led to an exceptional charge of €103.6m (net of tax) leading to a net loss for the year of €60.1m. Adjusting for exceptionals and amortisation the company reported net income of €49.7m. Net debt at the end of the period was €153m ahead of our €105m on higher cash tax charges and on the cost of the two agronomy based acquisition announced in H2. The company announced a dividend of 8c per share for the year.

 

On outlook whilst noting its strength in agronomy, the company remains cautious, particularly on demand for agri-inputs in the ROI and on sustaining the current levels of profitability in the food business. The company stated that "[b]ased on existing market conditions the Group anticipates that adjusted diluted EPS for the current business for 2010 will be lower than ... 2009." In discussion with management they are guiding an EPS decline of 5-10% for FY2010, although they note that profits are 70% H2 weighted and as such visibility in that period is limited at present. With 55% of profits arising out of sterling related businesses (a -3.5c impact on EPS in FY2009), the strength or weakness of sterling has a significant impact on profitability with every 1p move impacting operating profit by c€350K. The company has indicated that the guidance provided is based on an exchange rate of £0.90/€. We have reduced our forecasts for FY2010 to reflect this cautiousness and now forecast EPS of 34.1c (-5.6% yoy and a 6.4% reduction from our previous forecasts). The company is guiding FY2010 cash generation of €25-30m

 

 

The weekend press continued to discuss the INM ongoing saga. INM has announced an extension of its standstill agreement with its Bank lenders and Bondholders has been extended until October 30th from September 25th. The extension is to facilitate the "continuation of ongoing and constructive discussions between all stakeholders in relation to the Group's financial restructuring". The announcement notes that the Banks and Bondholders have both confirmed their consent to the disposal of the South African Outdoor advertising unit on the terms previously announced. Newswires quote an emailed statement from the company this morning that its board will be meeting today to review "various restructuring proposals" and that it "has not made any final determination on any proposal". This follows a press report on Sunday which stated that Denis O'Brien is exploring legal action against the board of INM in the expectation that the board meeting (on Monday) will reject his restructuring plan for the Group. According to the article, the board must decide between the company's and O'Brien's plans and a spokesperson for O'Brien is quoted as saying that "The company has clearly take a decision to reject Denis O'Brien's offer….This decision has clearly been taken by the O'Reilly's without holding a board meeting. Once again, this ignores good corporate governance". 

 

Anyway , A better evening , better tone to markets…

 

Have a good evening ,

 

Liam

 

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

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