Glanbia (GLB.I) – Milking It
(This is the fifth installment in my series of case studies on the shares that make up my portfolio. To see the other four articles, on Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company names)
To most Irish people, Glanbia is simply synonymous with dairy products as a result of owning market-leading consumer brands such as Avonmore and Premier Dairies. However, this is only one part of the story. Glanbia has three key units – US Cheese and Global Nutritionals; Dairy Ireland; and its International Joint Ventures.
The scale of the group is impressive – its 4,300 employees process 5.8bn litres of milk globally, produce 477,000 tonnes of cheese, manufacture 262,000 tonnes of dairy-based ingredients and generate revenues, including joint ventures, of close to €3bn annually.
In terms of its main business units, US Cheese and Global Nutritionals is an integrated business spanning commodity products to value-added nutritional products, including leading sports nutrition brands Optimum Nutrition and BSN. There is a very powerful overlap between the parts of this division, given that whey, a by-product of cheese production, is a key input for high-margin nutritional supplements. In 2010 this division achieved revenues of €1bn and EBIT of just under €94m.
Dairy Ireland processes 1.8bn litres of milk annually. Over 80% of this is exported to more than 50 countries worldwide, with the rest primarily ending up in domestic milk consumption. In 2010 this division achieved revenues of €1.1bn and EBIT of €44m.
The third key component, its International Joint Ventures, comprise its giant Southwest Cheese 50:50 jv, which has the capacity to process over 3.5 billion lbs of milk annually; Glanbia Cheese, a 51% owned jv with Leprino that is the the largest mozzarella manufacturer in Europe; and Nutricima, a 50-50 JV with PZ Cussons that sells branded consumer products, including liquid, condensed and powdered milk, in Nigeria. In total Glanbia’s joint ventures had turnover of €0.4bn and EBIT of €22m in 2010.
Glanbia’s recent performance has been very strong. In its interim management statement in November the group expressed confidence that it would deliver 2011 adjusted earnings per share growth of circa 20%, on a constant currency basis, which is at the upper end of its previously guided range (18-20%). This was helped by strong growth in volumes and prices, with revenues in US Cheese and Global Nutritionals +35% in the first 10 months of 2011 compared to year earlier levels, while Dairy Ireland revenues rose 23% over the same period.
The longer-term drivers of the business are very robust. On the dairy side, the group has a significant revenue opportunity in emerging markets in particular. The phasing out of milk quotas in Europe offers big possibilities for scale processors such as Glanbia, as this article highlights, as Ireland has the scope to be the low-cost milk producer in the northern hemisphere. Indeed, it is no surprise to see ongoing consolidation in the Irish milk sector ahead of this. I have previously noted moves such as Connacht Gold’s acquisition of Donegal Creameries’ milk business.
In terms of US Cheese and Global Nutritionals, its long-term drivers are similarly enhanced by rising affluence in the developing world (which provides scope for consumers to ‘trade up’ to healthier, value-added foods and supplements), while in the developed world ageing populations are underpinning rising ‘health and wellness’ demand.
Glanbia is well placed to exploit these structural drivers. Over the past four years it has spent €325m buying Optimum Nutrition and BNS, while I estimate that it has spent over €200m on capex during the same period. This investment has provided it with a solid base to underpin future growth (I also note speculation before Christmas that the group may be planning a further €50m investment in its Dairy Ireland production capacity to exploit the lifting of milk quotas).
The only downside to this investment is that the balance sheet is carrying quite a bit of debt. Stripping out seasonal factors, net debt stood at €434.8m at the end of H1 2011. I should add, that this is very manageable for Glanbia – I estimate that it will achieve EBITDA of just under €220m in 2011 (results are due in late February), while EBITDA/net interest cover on my numbers comes in at a very healthy 8.7x in the same year.
In terms of the valuation, based on my estimates for 2012 (which are – and this is not deliberate! – bang in line with consensus at the EPS level) and tonight’s closing price (€4.92), Glanbia trades on 10.4x 2012 PE and an adjusted 2012 EV (which includes the most recent i.e. 2010 end-year pension deficit) / EBITDA multiple of 8.2x. The stock also offers a 2012 dividend yield of 1.9%. Not particularly expensive by any means, but at the same time, not cheap either. Using a DCF valuation, with a 10% discount rate and 4% terminal growth rate, I come up with a fair value on the stock of €5.05, which is just under 3% above where the stock is currently trading. I should point out that my DCF model incorporates my estimated end-2011 net debt (€465m), and if I had used my end-2012 estimate instead (€384m) this would have produced a valuation of €5.33 (8.3% upside). What this highlights is that as the company pays down debt the potential upside for equity holders is enhanced over time.
Overall though, my sense for Glanbia at these levels is that while I love the company, I don’t love the price they’re trading at given the limited short-term upside implied by my model. So, I’m a happy holder for now.