Food Manufacturing

10 May 2019

Kerry Group: Steady progress

We have released a new report on Kerry Group today.

While we tick up our forecast FY19E adjusted EPS by 1.6%, margin progression remains our key concern as the company looks to integrate acquisitions and commit more to capex spend in 2019. Given the size of the company, we believe that further acquisitions will have an incremental rather than transformational impact on earnings growth.


Inputting the better than expected Q119A revenue growth numbers into our model drives a 1.1% increase in our FY19E adjusted EPS forecast for Kerry from a 0.9% increase in both trading profit and revenue. Further adjusting for current FX rates lifts this a further 0.5% across the board. As such we ae increasing our adjusted EPS forecast by 1.6% to 391.8c from a 1.4% increase in both trading profit and revenue to €889.9m and €7.10bn, respectively.


Kerry continues to report strong growth in China and, as with a number of peers (e.g. Givaudan, Symrise, Chr. Hansen and Danone) notes Brazil, Mexico and Russia as particular growth drivers in emerging markets over the quarter. Kerry opened its first manufacturing plant in Russia last year which has helped drive growth in a market where consumers are starting to follow “western” trends for “clean label” products.


Irish Economy: Inflation jumps to 1.7% – Economist: Philip O’Sullivan

The latest CPI release from the CSO shows that the headline rate of inflation jumped to +1.7% y/y in April from the previous month’s +1.1% y/y. This is the fastest annual rate of growth in prices since August 2012.


Three areas accounted for most of the upward pressure on the annual rate of inflation, Transport, Restaurants & Hotels and Housing-related items. There is likely to have been an ‘Easter effect’ in these data, with the 3.7% y/y rise in Transport prices led by a 19.8% y/y increase in air fares (which account for 1.2% of the CPI basket). Easter Sunday fell on the 21st of April this year versus the 1st of April in 2018. Another significant item that pushed up on the annual rate of increase average Transport costs include fuel (+4.8% y/y). Restaurants & Hotels prices were +3.7% y/y, likely due to the passing on of the hike in the VAT rate (from 9% to 13.5%) for hospitality services that was announced in last October’s Budget. Housing-related items were +4.7% y/y, with higher rents and utility bills leading the move in that segment.


Three sub-indices of the CPI that we closely monitor are Private Rents, Accommodation Services and Insurance. Private Rents were +0.4% m/m and +5.4% y/y in April, reflecting the ongoing mismatch between supply and demand in the housing market. Accommodation Services prices were +2.7% m/m and +4.2% y/y, with the annual rise here reflecting the aforementioned VAT increase. Insurance prices fell 20bps m/m and were -1.5% y/y, reflecting positive developments in the claims environment.


Due to the Easter effect on air fares mentioned above, we would expect to see the annual rate of increase in prices slow when the data for May are published. In any event, the annual rate of increase in prices has averaged 1.0% in the year to date, bang in-line with our FY19 forecasts and also well below the latest (4.1% y/y in Q418) data on annual wage inflation, so it is important to remember that many Irish households are seeing a decent uplift in living standards.


Trump green lights tariff increases

Talks between Chinese Vice Premier Liu He and US officials in Washington yesterday failed to reach an agreement over trade, which meant that at 12:01am (US eastern time) this morning, President Trump’s threat of an increase in tariffs to 25% (from 10%) on $200bn worth of Chinese goods came into effect. Note that this will only effect goods due for export from today and those already in transit will still incur the previous tariff level of 10%.


Talks will continue today, but any breakthrough at this point appears unlikely. One key question is what ‘necessary countermeasures’ the Chinese take. The Commerce Ministry this morning confirmed they would go ahead, but offered no detail on what they may be. How far the Chinese go in retaliating against the US could have a bearing on what the US might do in response. President Trump has already stated that the US is ‘preparing the paperwork’ on increasing tariffs to 25% on the remaining $325bn of Chinese imports which were not hit by the previous tariff rounds.


Consumer goods targeted

This remaining area of goods is dominated by consumer goods, which the White House has been reluctant to target so far. President Trump did however state that he hoped a deal could still be reached, as did the Chinese who stated that they hoped the two could meet halfway, suggesting that there is a desire on both sides to reach an agreement. However the road is likely to be a bumpy one and one that is unlikely to be resolved in the very short term.


The market reaction overnight has seen the S&P 500 fall a further 0.3%, its fourth consecutive fall. However Asian equity markets have witnessed a surprise 2% rise in the Shanghai Composite. The dollar has strengthened only slightly against a basket of currencies overnight, with the benchmark EUR/USD rate currently sitting in/around the $1.1230 level this morning after tipping off the pivotal $1.1250 level yesterday afternoon.


UK IP in focus

Manufacturing output surged 0.9% on the month in February, building on an upward-revised January jump of 1.1%. This looks to have been underpinned by factories stockpiling as a precaution against potential supply chain disruption. Indeed, this was reinforced by record visible trade deficits in January and February (see below).


Surveys suggests the rate of stockpiling accelerated further in March, with the inventories sub-component of the UK manufacturing PMI climbing to the highest ever recorded for a G7 country. While such activity may have provided continued support for manufacturing output, we doubt the sector will manage to maintain the strong growth seen in January and February.


We therefore look for a modest 0.2% monthly rise in output in March. Broader industrial production expanded by 0.6% in February following a rise of 0.7% in January. Within this, increased production at newer oil fields helped drive a 2.3% rise in mining and quarrying output, albeit largely offset by a 1.3% decline in utilities output amid unusually warm weather for February.


Turning to March, we struggle to identify any factors that might shift the non-manufacturing sub-sectors one way or another. Consequently, our industrial production forecast is also for a 0.2% rise in March.


Economic Releases

09:00 EZ Italian Industrial Production
10:00 EZ Italian Retail Sales
10:30 EZ ECB’s Visco Speaks
09:30 UK GDP + Industrial Prod. + Trade Balance
13:30 US CPI