Over the next 12 months, consumer price inflation will spike, due to the cost of imports rising on the back of a weaker pound. Even the humble banana, the UK’s favourite fruit, will not be immune, as the bulk of the country’s supplies come from Central America or the Caribbean and are purchased in dollar-linked currencies.
That said, what may be bad news for consumers could actually create a sweet spot for the right firms. Enter Fyffes, Europe’s second-biggest importer, with a 12% share behind leader Chiquita.
In March Fyffes was forced to reduce its 2010 guidance on the back of a triple whammy of unfavourable currency movements, bad weather and higher transport costs. With other firms similarly hit, the industry has been responding by hiking prices to improve profitability. But what has particularly caught my eye is that Fyffes is a geared play on Europe (accounting for 85% of revenues). Why? Because in December a landmark agreement was signed between the EU and Central America (CA) to end a 15-year trade war.
Currently, if a company imports bananas from, say, Colombia, it has to pay a hefty duty of €76 per ton. However, under this provisional agreement, tariffs are set to reduce by 16% to €148 per tonne in late 2010, and further decline to €114 by 2017. This means that Fyffes’ annual tax bill will plunge by €35m a year over the course of the next seven years.
Admittedly, not all of this saving will boost profits, since around two-thirds will probably have to be split between the growers and the supermarkets. Nevertheless, overall earnings before interest, tax and amortisation (Ebita) margins should still be boosted by a welcome 2% from 3.5% today.
Fyffes (Aim: FFY)
House broker Davy anticipates 2010 revenues and underlying earnings per share of €574m and 4.4¢ respectively, jumping to €586m and 4.9¢ in 2011. This puts the shares on skinny p/e ratios of 8.0 and 7.2 and they also offer a healthy 4.4% dividend yield. The balance sheet is also solid, with net cash of €36.6m, along with a 40% stake in property group Blackrock International Land, worth around €11m.
So what are the potential banana skins? The main risks for investors are those inherent in the fresh fruit sector. These include soft selling prices, crop damage due to poor weather, foreign-exchange fluctuations, trade wars, shipping costs and cut-throat competition. Furthermore, Fyffes’ smaller melon and pineapple operations (about 10% of profits) need to be watched as they’ve been struggling of late. But given the heritage of the brand, together with the banana’s traditional resilience (even in times of crisis), Fyffes should continue to prosper on the back of greater global consumption and the trend towards healthier eating.
Recommendation: BUY at 35.25p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments