Glanbia plc is an Irish-based dairy and nutrition company with a euro-denominated listing on the London board as well as the Irish exchange. It reports in euros, used in this article.

The company recently delivered its half year results for the six month period to 4 July. The results weren’t as strong as usual for the company, but still showed growth in a difficult operational environment. I don’t like the complexity of the business so don’t rate it a buy, but for investors keen for exposure to the U.S. nutrition market, it is worth knowing about Glanbia as that is actually its key profit driver.

Glanbia: A Nutrition-Focused Conglomerate

The Glanbia business is a bit tricky to understand at first glance. Its structure reflects its historical roots as, basically, an Irish dairy farmers’ co-operative. Over the years it moved into other, somewhat related, food and nutrition businesses. Today, while it emphasizes its focus on the nutrition business, it is a minority shareholder in Glanbia Ireland which brings together a number of consumer and agricultural businesses.

The nutrition business is split into two parts, Glanbia Performance Nutrition and Glanbia Nutritionals.

Glanbia Performance Nutrition sells nutritional drinks, foods and so on, both through outlets like gyms and clubs and direct to consumers. It has built this U.S.-heavy business partly through acquiring brands such as Optimum Nutrition and Bio-Engineered Supplements and Nutrition.

As well as a global facing nutritional ingredients business, the Glanbia Nutritionals division includes a sizable U.S. cheese business. It provides U.S. cheddar style cheese to mostly U.S. customers.

As well as Glanbia Ireland, the company has shareholdings in joint ventures including cheese businesses in the U.S., U.K. and Europe.

In essence then, Glanbia makes money from two key product types albeit through a somewhat convoluted corporate structure. They are nutritional products, both finished and in ingredient form, and cheeses. While the dairy legacy helps explain both to some extent, this isn’t necessarily a corporate setup one would invent from scratch, in terms of synergy. However, the company has been making it work well. All parts of the business showed growth in the last full year.

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Source: company 2019 annual report

It’s worth noting that although it’s an Irish company with a London as well as Dublin listing, at its heart, Glanbia is actually a way to invest in nutrition and cheese in the U.S. The company generates over 90% of its earnings in US dollar currency, largely because of the heavy exposure of the various parts of its business to U.S. end markets.

Reinvestment in Growth

A major attraction of the shares for long-term holders has been their growth in dividend payments. But it’s worth noting that the company focuses on building its business rather than returning the majority of earnings to shareholders. The company’s 2022 three-year vision calls for a payout ratio of 25-35%, although it did also plan to initiate a share buyback program this year which raises the question of whether it is struggling to find sufficiently lucrative uses for capital in growing the business returns. It is still on the hunt, apparently, announcing with its half year results the acquisition of Canadian flavors business Foodarom.

In line with this, the board recently recommended an interim dividend of 10.7c, constant from last year’s level. It’s worth taking a moment, though, to appreciate that for years, the company has delivered consistent 10% increases in dividends, while also stepping up its dividend markedly in 2017.

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Interim (C)

3.03

3.33

3.66

4.03

4.43

4.88

5.37

5.91

9.71

10.68

10.68

Final (C)

4.49

4.94

5.43

5.97

6.57

7.22

7.94

16.09

14.49

15.94

Total (C)

7.52

8.27

9.09

10

11

12.1

13.31

22

24.2

26.62

10.68

Dividend annual growth %

10%

10%

10%

10%

10%

10%

65%

10%

10%

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Table calculated by author using data from company annual reports

At the current share price of 9.33 euros, the current yield is 2.9%: respectable but not remarkable.

The company’s leverage is about 1.9x: higher than I would like, but supportable.

Revenue Growth Should Continue

The company has ambitious growth plans in the current three year period, compared to their performance last year.

Source: company 2019 annual report

I think the revenue target looks aggressive especially in the current environment, when revenue in the wholly owned business for the first half showed only a 4.5% increase (still a creditable performance in my view given the tough market, but clearly not enough to reach the 2022 target without improved performance). Similarly, I think the growth in earnings target looks ambitious on current form.

However the long-term growth trajectory is quite promising. The management has shown clear strategic focus in growing the company over many years. Both markets are growth markets: the demand for nutritional supplements continues to grow, making Glanbia an attractive acquisition target, while the company’s U.S. cheese business is showing very healthy growth. The first half showed 19.2% revenue growth in the U.S. cheese business year on year (this doesn’t include all the cheese JVs), partly due to stronger pricing. However, the cheese business is very low margin: 1.9% in the first half (for the U.S. cheese business), versus 3.7% for performance nutrition and 12.4% for the nutritional solutions business. While the performance nutrition business has had a difficult time and a management reorganization may restore margins to their previous levels around double today’s, the point remains that cheese is a far lower margin business for the company than nutritional ingredients. Long-term I think a split makes sense, but for now it is at least comforting that the company is growing in all areas and is in growing markets like nutrition.

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The Challenge in Valuing Glanbia

I think the key problem with Glanbia’s investor proposition is that the business is not understood and underappreciated. It has a long history of revenue growth, dividend growth and strategic management. But the mix of businesses has limited logic and many people don’t realize the company is a way to play the U.S. nutritional market.

That has led to limited investor interest and a falling share price in the past year. However, the business continues to grow and has healthy cash generation, with 231 million euros of free cash flow in its most recent year, for example, for a price to free cash flow ratio at today’s share price of around 13. At current prices, the shares aren’t an absolute bargain but at face value they do look fairly cheap, at least.

Conclusion: Better Than GNC

It can be hard to make money in the U.S. nutrition space despite long-term growth and favorable margins: my GNC (GNC) investment was almost wiped out, and Vitamin Shoppe (VSI) didn’t do much for long-term investors, either. So there may be more to the market than I understand. That, and the complex structure of Glanbia’s business, put it outside my circle of competence.

But for those looking for a way to play U.S. nutrition, the stock is worth assessing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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