Kerry’s Wide Moat Should Help It Weather Current Macroeconomic Headwinds

Kerry Group KYGA reported third-quarter results, with volumes up 0.1% and a negative pricing contribution reflecting a deflationary environment. For the nine months, pricing and volumes were up 1.3% and 0.4%, respectively, driven by good performance in taste and nutrition (1.5% volume growth and 3% pricing) and a decline in volumes in the dairy business (volumes down 6.2% and pricing down 6.5% as a result of reduced dairy prices and soft market supply dynamics).

Taste and nutrition’s performance continues to be driven by the foodservice channel (innovation with quick-service restaurants and coffee chains providing new menu developments, seasonal offerings), with the retail channel falling behind, reflecting persistent customers’ inventory management in North America. The group’s EBITDA margin improved by 10 basis points in the first nine months, driven by taste and nutrition (up 130 basis points in the third quarter and up 20 basis points in the nine-month period) with efficiencies and portfolio developments more than offsetting input cost inflationary pressures.

Regionally, apart from the Americas (volumes down 1.7% in the nine-month period and down 0.9% in the third quarter), the group’s growth was good across the rest of its markets with positive volumes (across the Asia-Pacific and Europe, Middle East, and Africa regions volumes were up 8.2% and 2%, respectively, in the third quarter), driven by both retail and foodservice channels.

Management confirmed cautious guidance for fiscal 2023, with adjusted EPS growth expected at the low end of 3%-7% on a constant-currency basis before an expected 2% dilution in the year from the sale of the sweet ingredients portfolio. Kerry also announced a EUR 300 million share buyback program, or roughly 2% of the company market cap at the time of writing. We do not expect to materially change our EUR 102 fair value estimate after incorporating these numbers. Shares are undervalued.