Food groups show the way in avoiding Ireland's debt trap

by independent.ie - 25/08/2011

"The author of the banking report, Peter Nyberg, described it as a "speculative mania''. Others have described it as a national addiction."

Either way, Ireland's gorging on cheap debt and property over recent years has left virtually every sector of the economy bogged down in leverage that may take a decade or more to substantially shift.

Ireland's companies are literally working for the banks (and a few hedge funds too).

Management strategy in many companies now is about managing debt, not managing the firm's capital.

Not a single sector appears to be immune from overly geared balance sheets -- from banks, to telcos, to media companies, to semi-states, to retailers to the Government, debt is ubiquitous.

But to the surprise of many, the sector that has managed to avoid the fatal addiction is agriculture and consumer foods.

The last two weeks have seen fresh financial statements from the big names of the Irish agrifood sector -- Kerry and Glanbia -- and while there are considerable challenges ahead for both, unsustainable debt burdens aren't something they need to worry about.

Glanbia's debt is less than 2.5 times its earnings, Kerry's is 1.7 times and Greencore's is 2.3 times. None of them are even close to breaching banking covenants and their interest cover is reasonably reassuring.

Balance sheet strength, of course, doesn't equal runaway profits, but in the current environment investors are looking for firms with low leverage, that also boast reasonable, but sustainable, profits.

For Glanbia chief executive John Moloney, Kerry chief executive Stan McCarthy and Greencore chief executive Patrick Coveney, this sweet spot has been reached.

Glanbia and Kerry, for example, boast profit margins of 6.7pc and 9.5pc respectively.

This is hardly the stuff of NASDAQ-listed tech companies, but the profitability is sustainable and has been produced without stretching balance sheets beyond prudent levels.

It is curious that the food companies of Ireland managed to avoid a debt trap so many others fell into.

Maybe the sector is just innately conservative due to its roots in the agricultural economy.

But the sector has seen bubbles before, like the runaway land prices of the 1970s. But for whatever reason, the sector has much to boast of in terms of behaving responsibly during the Tiger years.

It is not as if they haven't been spending money and expanding. Glanbia, for example, splashed out $144m (€100m) on a sports supplement business, Bio-Engineered Supplements and Nutrition, in January.

Greencore likewise has recently bought Uniq, the UK convenience food group for £113m (€128m). Interestingly in that case, the company is funding a large part of the purchase price by raising equity, rather than bank debt.

The only way the Irish economy will bounce back to GDP growth that can really get the wheels turning again is by either defaulting on debt (ruled out in most cases), by slow painful incremental debt reduction (long and laborious) or by growing profits and revenues, thereby shrinking the debt in comparative terms. The last method is the preferable one.

The agrifood sector is showing the rest of Irish industry how to grow profits without blowing up your balance sheet.

More Details: http://www.independent.ie/business/irish/food-groups-show-the-way-in-avoiding-irelands-debt-trap-2857108.html