EUR 850.00 For Business Accounts Only

Morningstar | Kerry's 1Q Confirms Growth Trajectory; Guidance Reaffirmed; Shares Attractive

Kerry Group reported first-quarter 2019 results, with reported group sales growth up 10.3% (3.3% volume and negative 0.2% pricing, 4.7% acquisitions and 2.5% currency), in line with our annual estimates. The group's trading margin ticked up 10 basis points, the result of a 10-basis-point improvement in taste and nutrition, lower than our 20 basis points expected for full 2019 mainly because of Brexit risk mitigation costs. The consumer foods division's margin was down 10 basis points (equal to our annual expectations) as it continues its realignment-for-growth programme. Management reaffirmed expectations of 6% to 10% adjusted EPS growth at constant currency for fiscal 2019 (versus 10% in our model). Given this broadly in-line set of results, we maintain our EUR 110 fair value estimate and wide moat rating.

In taste and nutrition, the group's main unit (88% of sales, 81% of profits), volume growth increased 3.8% and pricing was down 0.2%. Developing markets and food services continue to be the main drivers, with 9% and 5.1% growth, respectively, with volume growth accelerating in Europe (2.4% versus 1.7% in the fourth quarter of 2018). In the consumer foods unit, volume growth was low, with its private label being challenged and margins contracting by 10 basis points following Brexit risk mitigation costs.

Despite shares being up more than 10% since our February initiation (versus up 5% for a group of ingredient peers we follow), Kerry still offers a compelling investment opportunity for patient investors, in our opinion. The shares are trading roughly at a 10% discount to our EUR 110 fair value estimate. We think current valuation levels offer an adequate margin of safety, with our worst-case scenario valuing shares at EUR 85.