Goodman Fielder goes on a diet

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The Goodman Fielder result has analysts pretty non-committal, suggesting a bottom may be in sight. The stock has underperformed the ASX 100 by about half since April of last year. The company reported a 29% decline in net profit after tax, but dividends may resume this financial year. The global trends are not especially propitious in the long term for food manufacturers in the longer term as Jeremy Grantham pointed out.

He commented that the worst US drought in half a century is further evidence that we are in the midst of a global food crisis. Prices of corn and soya have in recent months risen to all-time highs:

 “I believe this is evidence that we cannot sustainably feed a world population forecast to reach 10bn by 2050. Are we cowboy capitalists, with our love of growth at any cost, about to ride full speed into disaster?”

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Goodman Fielder is busy shrinking the size of its operations to deal with an adverse environment, as JP Morgan points out:

 “It is increasingly likely that cost savings will be reinvested in the medium term. While we view this as a positive for the company in the longer term, the recovery in earnings and margins is likely to frustrate investors in the near term. Offsetting the near-term earnings challengers, the news that GFF has entered into due diligence with a potential buyer of Integro could force the hand of any other party with an interest in the group while allaying fears of a potential dilutive equity raising.”

Deutsche Bank sees another tough year ahead:

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 “Commodity prices have risen, cost recovery is unlikely to get any easier and private label will continue to weigh on volumes and realised price. The focus on innovation will benefit the business longer term but will absorb some of the cost benefits. Notwithstanding the challenges, we believe the high single digit free cash flow yield will support the valuation”

Citi has a buy and a price taregt of 65 cents, but it notes the rise in input costs:

 “The recent spike in wheat prices has been widely reported, but other key ingredients for Goodman Fielder like palm oil and milk are falling in price. We believe less than 3% price increases are required to recover input costs. Recovery is more likely in FY13 given signs of a rational grocery retail backdrop.

Second-half momentum mixed — Group EBITDA rose by 3% in 2H12, compared with a 1H12 drop of 30%. The most pleasing result was for Baking, where earnings were flat in 2H12 and volumes rose 3%. Home Ingredients appears to have increasing pressure from both branded competitors and private labels.”

Goodman Fielder is going through a stabilisation period, and is trying to cut the size of its cloth to develop a more sustainable operation. It has a long way to go, however, and there are surely better options.

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