Crown slips on pride of the Kingdom as Kerry’s shares languish

After months of battling bankruptcy rumours, Beyond Meat, the US maker of plant-based substitutes including chicken nuggets and beef burgers, waved the white flag this week on its debt pile and agreed a deal with bondholders to eliminate $800 million of borrowings.

The restructuring – which will see the creditors accept bonds worth less than what they are owed as well as shares in company – sent Beyond Meat’s stock to an all-time low on Wall Street.

But it gives the 16-year-old Californian group a fighting chance after weathering a slump in sales over the past four years amid a change in perception of how healthy highly processed meat alternatives actually are – and the fact, in these price-conscious times, that they are, kilo for kilo, generally more expensive than the real thing.

Few Irish companies placed as much faith in the alt-meat revolution as Kerry Group, the maker of flavouring ingredients for most of the world’s largest consumer food companies, from Danone and Kraft to McDonald’s and Starbucks.

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In October 2021, chief executive Edmond Scanlon unveiled a strategy that placed plant-based taste and nutrition as one of the mega-trends it was chasing for growth. The others were authentic taste (using natural, high-quality flavourings in food); preservatives aimed at reducing food waste; and supplying ingredients to the health and biopharma sectors.

But even as Kerry was forecasting that plant-based food would grow six times faster than traditional food over the remainder of the decade, Beyond Meat’s revenues and share price had already started to decline. Plant-based meat and seafood unit sales would slump 28 per cent in the US, Kerry’s biggest market, over the following two years, according to US think tank Good Food Institute data.

Kerry has since shifted the focus from plant-based to the growing protein craze – where it specialises in making high-protein food more palatable.

While it could be argued this shows that a beast like Kerry can be tactically agile, it also raises questions over strategy.

And it’s not the only part of Scanlon’s vision four years ago that hasn’t delivered.

Kerry Group is on track to miss its goal of growing sales volumes by 4-6 per cent per annum for the third straight year.

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Shares in the group have slumped by 35 per cent over the past four years. And they are down almost 7 per cent from the time Scanlon took charge of the group eight years ago this week – even after Kerry has spent close to €1 billion, or eight per cent of its current market value, buying back shares in recent years.

Scanlon, whose €6 million pay package last year made him the best paid chief executive of an Irish plc with its main listing in Dublin, appears on track to meet his target of expanding the group’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin target of 18-19 per cent by next year. That’s largely thanks to the group selling a majority stake in its low-margin legacy dairy processing business at the start of this year to its former main shareholder, Kerry Co-op, as well scraping out efficiencies and reining in costs wherever possible.

The wider ingredients sector hasn’t had it great in recent years as it grappled with inflation and muted consumer demand. Take Givaudan, the Swiss flavours and fragrances giant. Its shares are down 20 per cent over the past five years. Or Germany’s Symrise (down almost 40 per cent) and New York-listed International Flavors & Fragrances (IFF), which have both slumped close to 50 per cent, as sales volumes remain subdued.

Kerry may be the pride of the Kingdom county since it was founded by Denis Brosnan in a rented caravan in a muddy field in Tralee in 1972 and set off on an international wave of dealmaking a decade and a half later – initially by buying Beatreme Food Ingredients in the US – to become one of Ireland’s most successful multinationals.

But few peers have seen the de-rating that Kerry has endured in the eyes of the stock market in recent times.

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Kerry’s stock is now trading at a level that its equivalent of 14 times analysts’ earnings per share (EPS) forecasts for next year – down by a third from its own 10-year historic average. While the wider sector has also de-rated, it is trading at 20 times earnings.

JP Morgan analysts called out Kerry’s low valuation in a report last week as “compelling” for potential investors.

They have taken some comfort in management changes in Europe – where volumes have been particularly weak for some time. Kerry has moved the previous head of its Latin American unit, Marcelo Marques, to take charge of Europe. It follows other movements at Kerry’s regional head level earlier this year.

Others are not so sure. “It’s become the sleepy play of the sector,” said one investor this week, who declined to be identified.

Another long-time observer of the company complained: “The entrepreneurial spirit that Kerry was famous for is now lacking, replaced by bunch of accountant-types looking for efficiencies.”

In fairness, while acquisitions under Scanlon have been slower than under the group’s three previous chief executives, he did try to pull off what would have been, by far, the biggest of all. Kerry was in the final running for the former nutrition business of US chemicals group DuPont six years ago, but lost out to a $26.2 billion bid from rival IFF. (There’s a strong view, too, that IFF overpaid for the asset.)

And he’s been willing to part with low-yielding and non-core businesses, including its consumer meats and meals business; US sweet ingredients portfolio; and, most recently, the Irish dairy business.

But if the stock continues to languish, will it only be a matter of time before an activist investor has a nibble?