Financial Analysis of Greencore Group PLC

In today’s climate it’s hard to find a company still making profits comparable to their previous financial year. Sustainable growth is hard to achieve for most global organisations, their debt’s are piling up as money is not as available as before so other means of generating profit are being thought of to try to reduce operating costs and increase profitability.

The truth of the matter is that the economic downturn in spending by consumer’s as well businesses is being felt worldwide in every economy. As a result of this meeting set goals and profit margin became harder which is some circumstances forced companies to try to reduce their losses which can become a catalyst for the sale of acquisitions that might be deemed as surplus to requirements in some circumstances. Greencore is no exception to the effects of this economic climate and it too went through some restructuring of some sort.

Through this project we analysed and tracked changes in Greencore Group over the last 12 months. We focused on the share price, capital structure, dividend policy, and future direction of the company in hope of getting a better understanding of their dealing and ethos.

INTRODUCTION

Greencore Group PLC engages in production and supply of convenience food and ingredients to customers, industrial, service markets and has a workforce of 7000 people based in Ireland, UK, continental Europe and the United States. The company function under two segment, convenience food and ingredients and related property. The convenience foods comprises of sandwiches, chilled prepared and soups, ambient sauces and pickles, cakes and desserts and Yorkshire puddings and incorporate the purchases and trading of gains, vegetable oils and import and distribution of cane and beet molasses. In addition to this its products through various brand names such as Aunt Bessie’s, Bisto, Burgundies, Green Valley, Heinz, Kiveton Kitchen and other known brand.

The Chairman of the company is Ned Sullivan, Chief Executive Officer is Patrick Coveney and the Chief Financial Officer is Tony Hynes.

Over the year have established an out-standing experience in customer brand and provide a selection of house and licensed brands. It has accommodated a UK nationwide chilled van distribution fleet so as to cater for individual outlets. Greencore malt and water was once incorporated as part of the company’s segment prior to sell out, as current issues have emerged that led to the exiting of the Malt and Bottle Water Business as due to deficit in profitability. The ingredients and related property segment that produces malt in Ireland, the United Kingdom and Belgium was associated with the action taken by the board to fulfil its objective as a business.

COMPANY SHARE PRICE

In this section of our analysis we will be looking at the share price for Greencore. We will analyse the highs and lows of each month and attempt to interpret the reasons for the increase/decrease in share price in relation to current affairs of the company.

Source: http://online.hemscottir.com/ir/gnc/ir.jsp?page=text-chart

November 2009
Announcement made by the company that other companies have made unsolicited offers for their Malt business and within the same month announced that they were to sell their bottling water facility. This seems to signal poor prospects for the company and the price of shares start to fall.

February 2010
In this month Greencore had announced that they were to sell off their Malt distilling unit to Axereal a French co-op which consisted of Agralys and Epis Centre merging. The main purpose of selling off this unit was so that they could focus on their key operatives and reduce overall debt. Our analysis is that this has lessened the perceived value of the company and the general share price for the month has dropped. Within the same month Greencore announced that they will issue 206,637,211 with voting rights the total amount of shares issued amounted to 210,541,928, with the difference of 3,904,716 attributing to treasury shares.

March 2010
Confirmation made by the company that they have completed the disposal of malt and water facilities have been completed, this coming statement made towards the end of the month. This seems to have minimal affect on the share price for the following month, as shareholders may be unsure of the future direction of the company.

July 2010
It was announced during this month that Greencore notifies its intention to sell its Dutch based firm Greencore Continental. This month seen the average share price increase from the previous month, but the decline in the share price is evident since November 2009 where the share price has dropped from 1.42 cent per share to 1.31 cent per share. Shareholder value seemed to decline in the company within the last six months, even with an interim report stating promising operating performance in UK and US markets

August 2010
This month seen the completion of the sale of Greencore Continental to Convenience Foods Europe B.V. Disposing of another asset signalling to investors that the company may be taking a few steps back in off-loading so many assets may be discouraging to some investors, thus a drop in the share price again for this month.

November 2010
It was announced that Greencore would be looking to merge with Northern Foods PLC in order to reduce costs. This news has lead to an increase in the share price from 1.08 cent to 1.35 cent per share. The deal will be finalised in the early part of 2011. Shareholders see this as a strong prospective growth for the company in the future; share price shoots up to 1.35 for the day near the close of business.

Source: http://www.lse.co.uk/ShareChart.asp?sharechart=GNC

There has been a significant drop in the share prices of Greencore during the period of November 2009 to date, as at today (16/11/10) the share price is at €1.08 in comparison to the €1.40 the same time last year. We hope through our research we can find the root cause of this decline.

The big turning points in Greencore FY10 have been the sale of its Malt and Water division. The first to be sold was the water division in November 2009 to Highland Spring in a deal worth approximately €20 million (£17.5 million). Greencore were one of the largest suppliers to the UK market with about 40% of the market share. The deal was completed in April 2010.

Source: http://www.ise.ie/app/equityGenerateGraphTemp

Through the graph we can see there was a decline in the day after the sale of the water division. The sale took place on the 11/02/10 and there was a decline in its share price till the 15/11/10, this could be either due to shareholders being worried about the loss of the malt subsidiary or some other factors linked to the overall performance of the company as a whole. .

The Malt division was sold in February to a French subsidiary called Axéréal Union De Coopératives Agricoles. The deal was worth an estimated €116.25 million. On the 17th of November 2010 the company announced it would be merging with Northern Foods. The combined group will be called Essenta Foods, this is a good move for both Greencore as well as Northern Foods as this creates a greater financial profile and enhance strategic flexibility in the future.

CAPITAL STRUCTURE

Capital structure can be defined as ways an organisation chooses to finances or funds it assets. Generally, comprises of combination of equity, debt and hybrid securities. It is the company’s financial frame work that determines long term debt, preferred stock and network. There are various theories of capital structure suggested by discipline in this important arena. For example, Modigliani and Miller argue that in perfect market, how a firm is finance is irrelevant to its value. This effect, make available the base with which to examine real world reasons why capital structure is relevant, that is, a company’s value is affected by capital structure it applies. This theorem is commonly known as the irrelevance principle. Basing on the ongoing year of Greencore PLC Ireland and their recent interim management Report for the half year ended march 2010 and September 2009 report,

As illustrated in the table, the portion of equity increased and Debt reduced in 2010 as the company sold out Greencore Malt, water and brought back shares they had previously sold out to shareholder (treasury shares). However, the company reduces its Debt and Equity in 2010 but debt is still higher than equity shows that the proportion of the company’s debts outweighs that of their equity which implies that Greencore was highly financed by debts, meaning it is highly geared.

A company is said to be highly geared if its proportion of its debt is more than its equity and while a company is lowly geared when its equity is proportionately more than the total debt. Generally, having more debts is beneficial to the organisation as it attracts tax relief and therefore tax saving on interest payment on of debts.

Having compared 2010 and 2009 on a half year basis, we have observed a reduction in debts and increase in equity. As we ignore a half of the year in 2009 so as to identify whether the company have accumulated or pay-off portion of its debts or increase in equity. The company employs a combination of debts and equity to fund its operations with a majority of its source of capital being debt. We consider debt as an appropriate source of finance despite the fact that business will not have all of its cash flow available to do business and interest can be high.

As lender parties do not gain any part of ownership of your business and the only obligation to lending part is to repay debt. Also payment of loan is typically a fixed expense, according to the term of the loan. If a business uses debt to finance its operations, an interest repeat on your loan is tax deductible.

In other words it shields part of your business income from taxes and lower your tax liability every year. As the company reduces Debt and currently experiencing an increase in equity finance implies that they will be more attractive to investors. Equity finance could possibly do a business a lot of good as cash flow that would have been used to repay the loans, can be used to grow the business. It’s frightening when you have to give a piece of ownership in your business to shareholder in an exchange for funds, as you don’t have control over your destiny regarding the business, but for the fact that the both parties share the risk and investor can bring on board experience and expertise makes it more worthwhile.

Total capital as of March 2010

This calculation is based on a half year period from March 2010

Total capital therefore is 199,469 million + 524,789 million = 724,258 million.

Proportion of equity
199,469million
199,469+524,789 = 28%

Proportion of debt
524,789million
524,789+199,469 = 72%
This shows that the proportion of the company’s debts outweighs that of their equity which implies that Greencore was highly geared by debts. Nevertheless the company reduce in debt and increase in equity as you can see above in 2010. Total capital as of March 2009

Total capital therefore is 144,576 million + 667,507 million = 812083 million.

Proportion of equity 144,576 million
144,576+667,507 = 18%

Proportion of debt 667,507 million
667,507+144,576 =82%
This shows that the proportion of the company’s debts outweighs that of their equity which implies that Greencore was highly geared.

DIVIDEND POLICY

Once a company makes a profit it needs to decide whether they want to invest this profit back into the company or would they pay it to shareholders in the form of dividends Dividend policy is defined by Brealey, Myers & Marcus as “The tradeoff between retaining earnings on the one hand and paying out cash and issuing shares on the other”

In this section of our analysis we will be looking at the dividend policy of Greencore, from looking at their interim statement and financial statement for 2010; Greencore pay out annual dividends; they seem to set out a policy of paying out dividends on a yearly basis. They had set an interim dividend of 3.0 cent per share. Set out below is a chart of their dividends paid out in the last couple of years Dividend History|

Description| Dividend for Period(cps)| Ex Dividend| Record Date| Payment Date| Final| 4.50| 02/12/09| 04/12/09| 01/04/10|
Interim| 3.00| 03/06/09| 05/06/09| 01/10/09|
Final| 8.21| 03/12/08| 05/12/08| 03/04/09|
Interim| 5.30| 04/06/08| 06/06/08| 03/10/08|
Final| 8.21| 05/12/07| 07/12/07| 04/04/08|
|
The annual payout is 40-50% of adjusted earnings per share as stated in the financial statements of 2010. This meaning that it will give out 40-50 % of its earnings per share back into the equity available for shareholders. Their earnings per share in the first half of financial year 2010 was 8.5 cent which was higher than they previously predicted at 7.4 cent.

The earnings per share are based on the earnings divided by the amount of shares issued during a specified period of time. So based on their analysis at that period of time their operating profit was higher than originally predicted and in turn increased their earnings, thus increasing earnings per share. So in their half year review they were originally to pay out 7.4 cent, this being adjusted to a 14.9% increase of EPS.

Companies may be financed mostly by borrowing which in turn would leave available funds for shareholders; this may give a good dividend payout in the short run but may leave a smaller return on capital gains. Some shareholders may wish to keep their shares as a form of capital gains rather than yielding a return in the form of dividends for tax purposes; as dividends are subject to tax and capital gains is subject to tax also but only a small proportion would be subject to tax. This may be more favorable to the younger generation; the older generation may look more favorable to higher dividends than capital gains, as this would be a source of steadying income.

The dividend policy within Greencore seems that they pay a dividend every year, and they have issued favorable dividends in the years 2007 and 2008, they seem to have taken a dividend cut for the year of 2009, this may come down to the disposal of assets of their malt and water facilities. They reduced their dividend to shareholders to 4.50 cent for 2009 as in 2008 they issued dividends of 8.21 cent. Our analysis for the reasons why they may have reduced their dividends paid to shareholders, was to retain profits from the previous years in order to continue the growth of sales in the U.S markets. They wish to attain the same level of operational excellence in the U.S as they do in the UK. Within the financial statements we seen in the last year that they were looking to reduce their debt levels, they achieved this by disposal of malt and water facilities as they were seen to be unprofitable areas of the company.

FUTURE DIRECTION

Based on the challenges occurred in the last year with the disposal of malt and water facilities and a decreasing share price, it will be hard for the group in terms of growth prospects due to financial constraints. It has been announced that Greencore will be merging with Northern Foods PLC soon to be trading as Essenta Foods plc. Other directions for Greencore in terms of future direction: * Will delist from the Irish stock exchange as Greencore and will be expected to have a secondary listing as Essenta PLC in the London stock exchange * Improved share price due to the strength of the merger

* Stronger operational linkages between the two companies with increased competitive advantage in UK markets. * Improving on operational growth in U.S markets
* Following completion of the merger, Essenta Foods “will maintain a progressive dividend policy and target a dividend cover ratio of 2.0 to 2.5 times calculated on an adjusted earnings per share basis,” as stated by the company. * Shareholders in Northern Foods and Dublin-based Greencore will each own 50 percent of the new company, to be called Essenta Foods. Northern Foods shareholders will get 0.4479 of a new Greencore share for each share owned. More than 30 percent of Greencore’s shareholders and 12 percent of Northern Foods’ investors have already expressed support for the deal. Here is a list of key challenges facing the company, as stated by them: * Tougher consumer environment reflecting difficult economic conditions. * Continued demand for excellent service and high innovation from customers * Overcapacity in prepared meals

* Capitalising on early momentum and market promise in the US * More difficult credit conditions increasing pressure on working capital

Conclusion

It is evident from the key challenges set out from the company above that they were experiencing stagnated growth within their industry; credit facilities were constraining the ability for further growth. We can see from the table below areas identified that are challenging for the company in their future direction and growth of the company, these are all areas that were challenging towards the company before their expected merger with Northern Foods, we have analysed this and can see that the merger of the two companies will give them better economies of scale and better distribution costs, with more warehousing facilities and the more distribution channels this will give the company a better prospective for growth in the future, especially in the UK markets, as for the US market we are unsure of the outcome for this so far as we are unaware of the terms within the US market.

While they have struggled in the market prior to this merger things are starting to look up for the company. The .30cent jump in their share price at the end of trading hours (17/11/10) was very much a life line for a company who have been on a downhill slope for most of the period we have analysed them. The true profitability and fruitfulness of the merger is still very much unknown with the economic climate still very much unstable nevertheless things are taking a positive turn for Greencore PLC and hopefully this new merger brings forth a renewed competitiveness in the stock market.

Bibliography

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* Available: http://greencore.com/assets/docs/Rule_2.5_Announcement.pdf * . Last accessed 17th November
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