Goodman Fielder’s Project Renaissance savings plan unlikely to flow to earnings, analyst says

Goodman Fielder, which makes Meadow Lea margarine and Irvines pies, may not see much of its Project Renaissance cost savings programme flow through to improved margins as supermarket rivalry pushes down prices, according to research house Morningstar.

The Sydney-based company, which manufactures and distributes staple foods including bread, milk, margarine, salad dressings, cooking oils and flour, is on track to cut annual costs by A$100 million by 2015 as part of its Project Renaissance plan.

"The market is overestimating the extent to which benefits of Project Renaissance will flow to the bottom line and underestimating the effect that the continued dominance of the supermarket chains will have on suppliers over the long term," Peter Rae, an analyst at Morningstar, said in a research note.

"Further benefits from Project Renaissance will be realised, but we expect much of this will be used for increased direct marketing and brand building," Rae said. "Underlying conditions are likely to remain challenging given the pressure from supermarket private label and competing proprietary brands."

Morningstar, which recommends investors reduce their holdings in the stock, has lowered its estimate for adjusted net profit in 2014 to A$107.5 million, from a previous estimate of A$114.5 million. The estimate is still ahead of 2013 profit before one-time items of A$86.5 million because of a turnaround in its Asia Pacific business and as problems in its Fijian poultry business are resolved and interest costs fall.

Goodman Fielder's move to unwind some of its recent baking price increases in order to recover lost volumes is evidence of its lack of pricing power, Morningstar's Rae said.

"While we think management is doing a good job in managing the business in a tough industry, it is difficult to forecast any major improvement in earnings for the core baking and grocery businesses," he said.

Growth in supermarket private labels is likely to continue to put pressure on Goodman Fielder's grocery unit, where earnings fell 12 percent in 2013, and significant marketing spending will be needed to maintain brand value, Rae said.

Shares in Goodman Fielder rose 1.2 percent to 83 cents, having advanced 1.2 percent this year. The company's Australian shares are up 0.3 percent to 71.2 Australian cents, compared with Morningstar's 50 cent "fair value" estimate.

"The stock still looks expensive, trading at a substantial premium to fair value," Rae said.

Still, Goodman Fielder, which resumed dividends in 2013, should be able to continue to sustain a payout ratio of about 70 percent aided by debt reduction, strong cash flows and exiting non-core businesses, Rae said.

(BusinessDesk)