Origin Enterprises (OGN ID) – Green Shoots

Origin Enterprises is one of the cheapest stocks on the Irish market (it also has a UK listing). The Group also has a strong balance sheet, which affords it considerable optionality both in terms of corporate development and future shareholder returns.

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Origin listed about 15 years ago, having been spun out of Aryzta. It has three core propositions to customers – (i) B2B agri-inputs – prescription blended fertilisers, specialty nutrition and animal feed ingredients; (ii) Integrated agronomy and on-farm services; and (iii) digital agricultural services – the Group has on-boarded 1.4m hectares (will grow to 4m by 2023) to a platform which provides precision advice to farmers on their landholdings – to me this sounds like something that makes switching costs high for customers (how many other farm consultants have fleets of drones mapping farmland?).

It has two distribution channels, agronomist (a specialist plant and soil scientist who works directly with farmers, providing advice and supply inputs to optimise crop production on a sustainable basis) and B2B, with the end-users being farmers & growers and amenity professionals. The customer offering encompasses nutrition, crop protection, seed, digital and expertise / advice / prescription.

The Group operates across six countries – Ireland, UK, Ukraine, Poland, Romania and Brazil. This offers useful diversification, particularly given how extreme weather can impact on financial performance in any one market.

In terms of financial performance, FY 2020 (the Group’s financial year end is July) was a stinker, with constant currency revenue and adjusted EPS -11.6% (to €1.6bn) and -49.2% (to 25.7c) respectively. This outturn was driven by extreme weather events in Ireland and the UK, with COVID-19 providing a further headwind. One notable exception where the performance narrative is concerned is free cash flow, which widened to €64m from €54m in FY 2019. OGN has a strong track record of cash generation.

Happily, FY 2021 (results will be published next month) is set to show an improved performance. In its Q3 trading update on 30 April, management guided that FY EPS will be between 34c and 36c. As the Bloomberg grab (from a week ago) at the top of this piece shows, the market is a touch above the high end of that range, penciling in 37c. This puts OGN on a prospective PE of just 9.2x, based on Friday’s close of €3.39. Per Koyfin data, all of OGN’s quoted peers – NWF (12.2x), Wynnstay (15.0x) and Carr’s Group (13.5x) – are on double-digit multiples.

This improved performance is being credited to more settled weather conditions, which is fair enough. However, in the background there are a lot of corporate developments which offer the potential for stronger earnings progression in the future.

OGN has divested a number of peripheral assets in recent times. In FY20 it sold its 20% shareholding in the Brazilian firm Ferrari Zagatto for €1m. During FY21 it sold its Belgian fertiliser business for €15.5m. The Group has €24m of property held for sale on its balance sheet, most of which relates to land in the Docklands area of Cork City in Ireland. It has agreed to sell this land to a well-regarded local developer, although it will recycle a portion of the consideration in relocating its Goulding’s Fertiliser operations from the Cork Docklands to a site with a long industrial heritage in Cork Harbour. The principle of relocating industrial / port activities from Cork City to the Harbour area is supported by both national and local government.

OGN has not just been a seller of assets. In March it strengthened its UK amenity business by acquiring Greentech, a manufacturing and distributor of landscaping, forestry and grounds maintenance equipment. While no financials were disclosed, Greentech accounts filed at UK Companies House show that it delivered operating profits of c.£1m a year in each of the past two years.

A quick side-note on Brexit and ESG. Origin Enterprises is particularly well positioned for both of these. In the UK, there is a demonstrated need for increased food production post-Brexit, which brings OGN’s agronomic expertise to bear. Across the planet, the need to marry food production techniques with sustainability is an obvious driver of increased demand for scientifically robust approaches to farming, which again leans on OGN’s capabilities in its end markets.

Returning to the financials, reflecting the seasonality of the business, the net debt position is very different throughout the year. At end-FY2020 (July 2020), net bank debt was €53m (€93m including lease liabilities) and this rose to €158m (€203m including lease liabilities) at end-H121 (January 2021). Given the aforementioned cash generation qualities of OGN, it is unsurprising that Bloomberg consensus has just €4m of net debt penciled in for FY21. This low leverage position gives management optionality across shareholder distributions and/or acquisitions.

I view OGN as an attractively valued stock in both absolute terms (single digit earnings multiple) and relative to peers, which is leveraged to some of the megatrends affecting farming practices (Brexit, ESG) and possessing a strong balance sheet that it can use to enhance shareholder returns over time. For these reasons, I am happy to be long OGN.