Stock pick: Nikko Asset Management

Founded in Ireland in 1972, Kerry Group (LSE: KYGA) is a leader in the speciality ingredients space. It operates through two business segments: taste & nutrition and consumer foods. Its primary business is to formulate ingredients and find innovative solutions for its end-markets.

• KYGA’s leading integrated solutions platform provides its customers with a broad range of ingredients for their final product, helping to create a strong and lasting relationship between supplier and consumer. No other ingredients player has developed such an advanced integrated solutions offering.
• The company has a strong financial profile, offering consistent volume growth and margin improvement, supported by strong free cash flow generation. These attributes make the company particularly resilient during periods of financial downturn.
• KYGA is well-aligned to address changing consumer trends. This highlights that Kerry is strategically positioned to offer good growth over the long-term.

Source: NikkoAM

KYGA is a “partner of choice” for many consumer packaged goods companies. Its competitive advantage ultimately resides in its leading integrated solutions platform, proprietary technology and focussed team of expert food scientists, all of which we believe are well ahead of its competitors.

Most compelling to the investment case is KYGA’s ability to address fundamental changes in the food industry today: a demand for health & wellness, growing concern around sustainability and food waste, and a desire for authentic and diverse tastes. KYGA’s ability to meet demand makes the company an appealing long-term investment.

Market penetration remains low and KYGA has the largest exposure to Emerging Markets compared to peers, with EUR 1.4 billion of sales in these regions. Since these locations offer the greatest opportunity for growth in the coming years, we are confident that KYGA is well-positioned to endure over the long-term.

In terms of environmental, social and corporate governance (ESG), KYGA states that sustainability is embedded in the company’s core philosophy. With one billion products consumed per day that contain a KYGA solution, the company has an excellent platform to promote sustainability initiatives worldwide.

The COVID-19 pandemic has presented a challenging operating environment for KYGA in the short term. With Foodservice accounting for 27% of the company’s revenue and consumer-packaged goods companies focused on simplifying their product offering to accommodate increased demand, investors are concerned that the requirement for flavour and ingredient innovation is fading. However, in the 1Q20 earnings call, KYGA’s CEO stated that the innovation pipeline is full, with customers more open to change than ever before and actioning briefs in days rather than months. This commentary is encouraging as it highlights that KYGA is strategically positioned to help its customers navigate their way through these particularly testing times and shall ultimately emerge from the crisis in a much stronger position.

This information has been prepared and provided by Nikko Asset Management. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 22 May 2020 and is subject to change.