2023-08-10 04:30:00 ET
Summary
- Kerry Group plc reports increasing revenue but slightly lower EBITDA in H1 2023.
- The company completed two acquisitions and sold its Sweet Ingredients portfolio, impacting net income.
- Kerry remains on track to meet its guidance and expects a strong second half of the year.
Introduction
As explained with a few examples in my previous article , Kerry Group plc ( KRYAY , KRYAF ) is an Ireland-based company active in the food, beverage and pharmaceutical industries. Its core business is the " value add ingredients and solutions " where it helps its customers to develop the specific taste for its products. Think about making a burger taste better, or making a stevia-sweetened drink taste good without compromising on taste. One of the more recent challenges comes from the non-alcoholic beverage industry which wants its non-alcoholic products like beer taste exactly the same as the "normal" product. The stock wasn’t cheap (and still isn’t cheap)
Kerry’s primary listing is on the Dublin Stock Exchange where the stock is trading with KRZ as ticker symbol . The average daily volume in Ireland is almost 230,000 shares, making it the most liquid listing. Kerry reports its financial results in EUR and trades in EUR, so I will use the Euro as base currency throughout this article.
An increasing revenue but slightly lower EBITDA
Whereas Kerry faced a more severe margin pressure in the first quarter of the year, it was able to improve its margins in the second quarter of the year with a 20 bps increase. The relatively strong performance in the second quarter was boosted by what the company calls resilience in the sector, despite seeing a general trend of destocking and rethinking the supply chain. According to Kerry, its activities in the customer innovation segment was focusing on developing new taste profile and improving the nutritional characteristics.
The company also completed two acquisitions by purchasing a Colombian company active in the meat market and a Chinese company which focuses on local foodservice chains. The acquisition of the latter was only completed in July and will only start to contribute from the second semester on.
Kerry had plenty of cash to complete these transactions considering it completed the sale of its Sweet Ingredients portfolio during the first semester. That portfolio was sold for a total of 483M EUR of which 358M EUR is payable in cash while a 125M EUR vendor loan was issued. Kerry Group completed the sale of additional operations in South Korea and South Africa for a sales price of 5.3M EUR. And although that’s a pretty low price tag, the company has booked a 78.5M EUR gain on these disposals as it will now be able to avoid a hefty reorganization cost.
While these are relatively small gains in the greater scheme of things, it did have an impact on the reported net income in the first half of the year.
The total revenue increased to 4.12B EUR on a reported basis (including the impact of the divestments: on an organic revenue basis, the company reported a 5.1% revenue increase). And as you can see below, the total EBITDA remained pretty flat at 518M EUR and that’s what has led to the small margin compression with an EBITDA margin of 12.57% in H1 2023 compared to 12.75% in H1 2022 and 13.86% in the entire financial year 2022. Keep in mind Kerry plans to expand its EBITDA margin to at least 18% by 2026.
The reported operating profit came in substantially higher than in the first half of last year, and that’s mainly due to the special items: whereas the company had to record a charge of almost 70M EUR in H1 2022, it reported a tailwind of 40.5M EUR in the first half of this year and that boosted the operating income to 407M EUR. Excluding the non-recurring items, the operating profit would have been relatively flat compared to a year ago.
That also is the main reason why we shouldn’t read too much into the very impressive net profit of 358M EUR, which works out to 2.02 EUR per share. While this definitely is an improvement over the 1.28 EUR EPS in H1 2022, that semester was pretty light due to non-recurring items while the pendulum swung the other way in the first semester of this year.
In my previous article I was focusing on the cash flow performance of the company, and it only makes sense to have another look at Kerry from that perspective.
The reported operating cash flow in the first semester was 310M EUR but keep in mind this includes a 90M EUR investment in working capital elements and a 55M EUR cash tax payment although only 46M EUR would have been due based on the normal circumstances. And as you can see below, the 40.5M EUR gain from the "non-trading items" was deducted again, as this was mainly an accounting gain.
That being said, we should also still deduct the 17M EUR in lease payments, and by making all these corrections we end up with an adjusted operating cash flow of 392M EUR.
Kerry spent about 100M EUR on capex, resulting in an underlying free cash flow result of 292M EUR. And considering the current share count is approximately 177.6M shares, the net underlying free cash flow result was approximately 1.64 EUR per share. And while that’s lower than in H1 2022, keep in mind the total capex in the first half of last year was substantially lower at just 61M EUR versus 99.8M EUR in the first half of this year.
Kerry remains on track to meet its (reconfirmed) guidance. The company still expects to achieve a 1-5% adjusted EPS growth (on a constant currency basis). The adjusted EPS in H1 came in at 1.80 EUR per share versus 1.76 EUR per share in the first half of last year, so it’s fair to say Kerry remains on track.
Investment thesis
As mentioned in my previous article, Kerry Group isn’t cheap and will likely never be cheap. Right now, the stock is trading at a market cap of approximately 16B EUR and combined with the net financial debt of just under 1.8B EUR (excluding lease liabilities) and with an adjusted EBITDA of approximately 500M EUR in H1, the stock is still pricey. That being said, we should expect a seasonally strong second half of the year with the average analyst consensus estimate aiming for a full-year EBITDA of 1.2B EUR (and thus in excess of 1.15B EUR excluding lease payments).
I currently have no position in Kerry Group. I like the company’s business and I like its strong financial performance, but I’d like to wait for a better entry point.
For further details see:
Kerry Group: Beware Of Non-Recurring Items In The H1 Net Income