Fall in share price is a chance to invest in Ardagh’s success story
ARDAGH Group traces its origins back to the Irish Glass Bottle Company, which subsequently listed on the Irish Stock Exchange as Ardagh plc. However, it was 1998 — when Paul Coulson built a stake in the company and became chairman — which marks the start of this phenomenal success story.
Within a year, Coulson helped mastermind the company’s £240m reverse takeover of the British company Rockware. At the time, the deal was around six times the size of Ardagh’s market capitalisation. This bold move made Ardagh the fifth-largest glass company in Europe. This was the first step onto a path of industry consolidation. Ardagh completed 23 acquisitions of glass and can companies over this period, increasing its revenues from around €50m to €7.6bn today.
Ardagh Glass was taken private in 2003 but relisted on the New York Stock Exchange in March this year at a price of $19 a share — valuing the business at around $4.5bn.
The key investment thesis for Ardagh lies in its deleveraging potential. Net debt stood at €7.25bn at the end of 2016. Proceeds from the IPO, plus free cash, will reduce this figure to around €6.5bn by the end of the year. Over the next three years, the company should generate free cash after dividends averaging €400m per annum. (Free cash is the amount of cash a company generates after deducting all expenditures.) Management has stated debt repayment will be the priority. Significantly, this rapid deleveraging, coupled with a current dividend yield of 2.8pc, could translate into a total shareholder return of around 12pc per annum. This makes for a very attractive investment case.
The share price has come under some pressure recently, declining about 20pc from its high in May. The lacklustre performance is largely down to a number of factors. One of them is that Ardagh reports its financials in euro. As around 40pc of its revenues are based in US dollars, the recent fall in the value of the US dollar against the euro has weighed on profits. Another factor behind the falling share price is the larger than expected declines in US mass-produced beer volumes.
While movements in foreign exchange are beyond the control of the company, the problem of share liquidity and exposure to mass-produced beer can be addressed. The group recently appointed Johan Gorter as chief executive of its global glass division. He has initiated a comprehensive review of the company’s capacity with a view to recalibrating capacity away from beer — and to focus instead on wine and food.
Food and beverage markets represent over 90pc of group revenues. While organic growth in its end markets is somewhat limited, that growth should remain stable and very resilient in an economic downturn. Furthermore, two-thirds of its business is on multi-year contracts. This reduces the volatility of margins and ensures stable cash flows. Management are proven in extracting synergies and boosting margins through a constant focus on productivity improvements.
In summary, the recent fall in the share price presents an attractive entry point for a company with significant deleveraging potential and a consistent track record of creating significant shareholder value through successful identification, financing and integration of acquisitions.
Ross McEvoy is portfolio manager of high-net-worth individuals and corporates with Goodbody Stockbrokers (www.goodbody.ie/wealth-management). His views are personal.