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ISEQ lower-Origin Enterprises analysed

Tuesday, September 18 08:59:38

The ISEQ is lower this morning at 3,269, down 12 points from Monday's closing levels as markets look for the next event or report to point to a direction. Yesterday's steep fall in oil futures along with the parallel fall in the Dollar will help Europe with the terrible burden of high oil prices on top of all it's other downward pressures on growth.

Origin Enterprises is in the Agri sector and it's results will be of interest. NCB Stockbrokers has an opinion on it's prospects:

Origin Enterprises, the agri-services group, reports FY12 results (year to July) on 19th September. We are forecasting c.E1.3bn of revenues, c.E70m of EBITA and 45.1c of EPS. We believe Origin has had a positive end to FY12 and will achieve earnings at the top end of the company's 44-45c guidance.

 Analysis: Weather conditions over the spring/summer appear to have been ripe for crop disease. 97pc of UK winter wheat was reported to show symptoms of fungal disease in June by CropMonitor. According to the CropMonitor data, 2012 has seen the highest incidence of crop disease for over 10 years. With a c.40pc share of the UK crop protection market, Origin is likely to have benefited from a strong final quarter as demand for crop protection increased.

Poor grass growing conditions in some parts of the country are also likely to have led to strong feed demand in Q4. Cuts in the farm gate milk price earlier in the year have reduced dairy farmers' profit margins and may lead to lower feed demand going forward. However, recent increases in global dairy prices should translate to increased farm gate prices in the near future, which will take some pressure off farmers.

On a visit to one of Origin's R and D facilities in June, Management expressed its confidence that Agrii can grow c.10pc/annum over the next 3-5 years, excluding acquisitions. With average year-end net debt / EBITDA expected at c.2.0x, there is significant scope for acquisitions; up to c.E100m by our estimates. An exit from one or more of its 3 major associates (CFG, Valeo Foods and Welcon) could supply further capital of up to c.E140m, we estimate.

Average Euro to GBP exchange rate is c.3pc weaker year-on-year, which will lead to a small translational boost to earnings; 60-70pc of profits are generated in GBP. Additionally the Group has c.E100m of sterling debt. The movement in the GBP/EUR rate from July 2011 to July 2012 is c.11pc, which we expect to increase reported net debt by c.E10m (0.1x EBITDA) to c.E75m. Looking forward to FY13, high crop prices are likely to lead to more on-farm expense to maximise yields, to the benefit of Origin.

 Conclusion & Action: Origin has been through a period of major restructuring and repositioning over the last few years and is now refocused as a key agri-services player in the UK and Irish markets.

We expect further exit from the remaining small Associate stakes when conditions allow and further acquisitions in the agri sector. We believe Origin has significant opportunities to grow market share and revenue per customer in the UK, but also has significant opportunities to recreate its Agri business model in other European markets, particularly in Eastern Europe.

We roll over our sum-of-the-parts based valuation to FY13 , which increases our price target to E4.80 from E4.40 and upgrade our recommendation from Accumulate to BUY based on a 20pc+ upside. Origin currently trades on c.8.3x our FY13 earnings and c.6.8x EBITDA, including dividends from Associates according to NCB Stockbrokers.