Shares in agribusiness group Glanbia have fallen to their lowest level for almost 10 years after the group shocked the stock market with a warning that profits in the current year will be devastated by high milk prices and severe margin pressure in its British cheese and international pigmeat operations.
Glanbia shares fell by almost 30 per cent from €1.60 (£1.26) to €1.15 (£0.91) as analysts rushed to slash their forecasts for 19992000 and many in the market believe the shares have further to fall to bring on an appropriate rating with other Irish and British food stocks.
"If you apply Express Dairies-type multiples and yields to Glanbia, then you are looking at a price of €0.85," said ABN-AMRO analyst Mr Joe Gill. Last year, in the immediate wake of the Avonmore-Waterford merger that created Glanbia, the shares rose as high as €4.53.
Analysts expect the shares to remain in the doldrums, with no reason for institutions to invest in the stocks until it becomes clear than Glanbia is definitely recovering. "At the moment, it's a no-go for investors and if you want a food investment there are far more attractive possibilities," said one dealer. The reduction in profits from these Glanbia operations is compounded by the profits foregone from the British liquid milk business sold to Express Dairies for £120.5 million.
Glanbia chief executive Mr Ned Sullivan would not give a specific profits forecast for 1999, but he did not disagree with analysts' forecasts that Glanbia's profits before exceptional items this year will be no more than £45 million (€57 million). Analysts had previously been expecting the profits before exceptionals for 1999-2000 to be in the order of £85 million (€108 million). Now, analysts are expecting £45 million profits and earnings per share this year of 9p (11 cents) rising to 10p (13 cents) in 2000-01.
The £40 million fall on the previous forecast profits is due to three main factors, only one of which is non-recurring. The commitment to pay 3p a gallon over the milk price average means that Glanbia is making no money from its Irish milk business and this accounts for £12 million of the lost profits. Glanbia has also been hit by the failure to complete the rationalisation of its Irish milk processing operations with the Rathfarnham dairy now closing later than expected.
Glanbia will also suffer from severe margin pressure in its British cheese and international pigmeat operations and this will account for a further £10 million profits, while another £12 million will come from profits foregone following the sale of the British liquid milk business to Express Dairies. The write-back of goodwill related to the British milk business means that Glanbia will report a loss of around £20 million next year.
"Next March, the annual results will look grim because we are clearing this stuff out of the way and we are getting the cash out of areas where we don't have strong positions," said Mr Sullivan. "After that we'll have the one-offs behind us and I expect from March onwards we'll be in a much better position."
But speaking to The Irish Times, Mr Sullivan accepted than when it comes to domestic milk prices, there is no sign of the industry in general getting to grips with the price paid for the raw materials. "Milk needs to go down by 5p a gallon," he said. Recent milk price moves, however, have been upward (Golden Vale) while both Kerry and Golden Vale are holding prices at levels that are not justified by world product prices.
"Historically milk prices have reflected world market prices and we expect that market prices and the milk price will come back into balance" he said, adding however that he expects no improvement in Glanbia's Irish milk business this year.
The 3p a gallon premium over the industry average is another major negative affecting Glanbia's milk business this year and next, with the group processing 300 million gallons a year. That guarantee of a 3p a gallon premium costs the group £9 million a year.
In addition to the problems in the Irish milk business, Glanbia is also being hit, albeit to a lesser degree, by oversupply of pigmeat in Europe exacerbated by weak demand in Russia and oversupply in Denmark and Holland in particular. "We will make money in pigmeat but less than we anticipated," he said, adding, "It is a cyclical business, but this cycle has been without precedent but we would hope to be back in balance by next year." The cheese business in the UK has suffered from higher imports and the strength of sterling.
