MORE than £70 million was wiped off the value of Kerry Group on the Irish stock market yesterday after the company's own brokers downgraded 1997 earnings forecasts for the agri-business group.
From an overnight level of 640p, Kerry shares fell as low as 575p before recovering to close down 45p on the day on 595p. The trigger for the selling came after Davy Stockbrokers - brokers to Kerry since its flotation 10 years ago - told the market it was cutting its 1997 earnings forecast from 37.3p to 36p per share, largely because of a higher-than-expected tax charge. Davy is understood to have made no changes to either current year or 1998 earnings.
At first, stock was offered by virtually every Irish institutional shareholder in Kerry, but later - as it emerged that the earnings downgrade was tax rather than operations-based - the selling became more focused on a couple of institutions. At 575p, buyers came back into the market and at the close Kerry shares were trading on a 580-600p bid-offer spread.
A spokesman for Kerry would not comment on the earnings downgrade nor the share price movement but said: "We are happy with progress and how the business is growing."
Privately, however, it is understood that Kerry executives are annoyed with yesterday's events and also believe that the tax assumptions that led to the Davy earnings downgrade are too conservative.
Davy's existing earnings forecast of 37.3p per share for 1997 was based on an assumed tax rate of 16.6 per cent and it is understood that the revised 36p per share forecast is based on an assumption that Kerry's tax charge will rise to 20 per cent for 1997. As the level of Kerry's overseas business rises, so does its tax rate, but company sources suggest that 20 per cent is too high for 1997. Davy analyst Mr John O'Reilly could not be contacted for comment.
Even after yesterday's sharp fall in the share, at 595p Kerry is still trading 23 per cent above its end-1995 level although the share is well down on its 688p all-time high of a few weeks ago. It is understood that the all-time high was reached after one of the bigger Dublin fund managers, who was heavily underweight in Kerry shares, bought substantial amounts of shares at 670-680p.
Whether yesterday's sharp correction in the share price was justified has produced differing opinions among Irish fund managers. One fund manager told The Irish Times the market had over-reacted and added that he had been a buyer at the lower levels yesterday. Others, who have tended to compare Kerry's price/earnings multiples against the Irish market rather than its peer group in the international food ingredients business believe that Kerry had become over-valued and was due a correction.
Kerry shares, however, had come under selling pressure even before yesterday's earnings downgrade by Davy and some market sources have suggested that one or two sellers took the opportunity of the downgrade to unload stock. "There was a feeling that the market in Kerry had overheated, the Davy downgrade simply catalysed that feeling," commented one fund manager who was very much of the view that Kerry had become expensive on a price/earnings multiple of over 24.
"The share had run ahead itself for technical reasons," he said - a reference to the move by the underweight fund manager to build up a higher stake in Kerry.
Another fund manager who described yesterday's turmoil in the Kerry share as "an over-reaction" said that the market had also become nervous about Kerry ahead of the transfer next month of 21.4 million plc shares for Kerry Co-op to 6,000 of the co-op's shareholders. This will reduce the co-op stake in Kerry Group from 52 per cent to 39 per cent.
Another fund manager said: "Even at 595p, the share is a lot higher than anybody expected a year ago. This could be seen as a healthy correction for Kerry just as last Friday was a healthy correction for Wall Street."
Kerry's corporate restructuring had led to speculation of a major rights issue in the first quarter of 1997. Most fund managers contacted yesterday said that the price correction yesterday means they are more likely to support such a fund-raising.