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Glanbia saw its share price hit €13.44 during Friday’s trading, a new three-year-low for the company before closing at €13.61.
This means that shares are now down 15% over the last 12 months.
Last April, following the announcement of the PLC’s decision to sell a majority stake (60%) in its consumer foods and agribusiness divsions to Glanbia co-op, shares surged to all-time highs peaking at €19.60.
On the day of the May vote to establish Glanbia Ireland, the shares closed at €17.77. Since the peak, the share price has fallen 31%.
Glanbia co-op, which now owns 31.5% of the PLC, following last years spin-out and purchase of the consumer foods and agribusiness has seen its value fall by some €220m over the course of the year.
Shareholders in Glanbia will be disappointed to see the recent share price decline and will question why. Below are some of the reasons.
Overall there has been little trade in Glanbia shares in recent weeks with volumes quiet low.
That said investors may be reacting more so to future growth than results for 2017 which are due in the coming weeks.
The share price growth and company valuation has been driven predominately by high single digit growth rates which may be now showing signs of slowing.
The engine of growth is slowing
Performance nutrition which accounts for more than one third of the business (wholly-owned) and half of the profits has been the big driver of performance for Glanbia with strong growth and margins in excess of 16%.
Selling performance products from whey protein powders to energy drinks and protein bars across 23 countries, its consumers span body builders, performance athletes to on-the-go lifestyle consumers.
However high margins and strong growth has attracted more companies such as the Hut Group, into the sector making it increasingly competitive.
To maintain market share, Glanbia has been increasing the level of investment in brands and moving away from supplying own-label products to specialist retail health stores in the US.
There is significant disruption in the sales channels for sports nutrition today. When Glanbia first moved into the category, specialist stores such as GNC and Holland & Barrett were the dominant route to market.
GNC itself has been struggling with high debts, falling sales and profits. It has been struggling to re-finance its debt which could force a sale.
While these specialist stores still hold around 50% of the total sales channel for the category, there is a clear shift to on-line purchasing from consumers. Today, online sales account for 18% of the market and it is growing rapidly.
New companies such as MyProtein, a UK brand focused on online sales, have captured an increasing market share and Glanbia has been forced to react.
MyProtein has become the largest sports nutrition brand in Europe and has recently moved into the US.
Owned by the UK online retailer, the Hut Group, MyProtein operates 21 international websites, demonstrating its global reach.
Last year Glanbia acquired two new businesses for a combined €181m. One brought the group into the plant-based protein category; the second extended its reach into the online retail channel.
Glanbia is guiding mid-single digit growth for the first year in performance nutrition. Investors will be keen to see strong organic growth following significant recent investments.
Currency weakness
Although the Group is based in Ireland with the euro as the functional currency of Glanbia plc, it has significant investments and operations outside the eurozone and primarily in the US.
As a result, currency movements, particularly movements in the euro/US dollar exchange rate, can significantly affect the Group’s euro balance sheet and profits and income statement.
Therefore given the company’s significant operations in North America, the recent share price performance can partly be explained by the weakness of the US dollar versus the euro, which is a negative for Glanbia.
The Dollar has weakened by some 15% over the past year where €1 now buys $1.22, compared to $1.06 this time last year. Based on 2016 profits, a 5% change in the euro/dollar exhange rate can have a €13m impact on profits.
Falling dairy markets
Glanbia’s largest division by turnover is its dairy ingredients business. It accounts for around 40% of the business (wholly-owned) and one third of profits.
Margins have been solid at 9% and this division was the main driver of growth in the first half of last year.
However when global commodity markets turn, it can be more difficult for processors and ingredients companies to maintain prices and profits.
It is true that in periods of higher dairy pricing, that can put some pressure on margins. So while lower dairy pricing may help and the percentage margin may be maintained going into 2018, the cash (profit) number may be down.
Slowing growth
Glanbia recorded adjusted earnings per share growth of 10% in the first half of last year. Currency had been a tailwind for the first half.
It expected currency to be a headwind for the second. The company is guiding to have growth of between 7 and 10% for the full year.
Valuations
Driven by low returns elsewhere and a plentiful supply of money thanks to quantitive easing, share prices overall have been on a bit of a bull run for the last five to six years. However there are signs that things may be about to turn.
It therefore may be the first signs of a correction in the valuation of the Glanbia share price. It has been trading at up to 30 times earnings multiples due to the continued growth in performance nutrition and divestment of the consumer foods and agribusiness divisions.
At the current share price it is trading at a more realistic price of 19 times earnings.
Time and money running out for Glanbia's MilkFlex loans
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