Aryzta hits record low as profit warning stokes bank covenants fears

Aryzta’s stock plunged a record low on Thursday as the beleaguered Swiss-Irish baked goods group issued a fresh profit warning, sparking fresh concerns about its new management’s ability to restructure the group and uphold its banking covenants.

In an unscheduled stock-exchange announcement, the company behind Cuisine de France said its earnings for the year to the end of July will be up to 12 per cent lower than previously forecast, which points to a 30 per cent slump on 2017’s result.

While the company said revenues in North America, the source of previous earnings disappointments in recent years, had stabilised, its profit margins in the region are being squeezed by rising labour and transport costs and problems in increasing prices for customers.

In Europe, group chief executive Kevin Toland, who took over last September following a clear-out of top executives, highlighted that his new management team was also battling soaring butter prices, German and Switzerland customers taking production in-house, as well as a "marked" slowdown in consumer spending in the UK.

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Cost-cutting

Aryzta also announced a plan to cut costs by €200 million over three years, which Davy analysts Cathal Kenny and Katy Hutchinson said is "now a necessity" for the group.

Shares in Aryzta slumped as much as 32.4 per cent in Zurich on Thursday to 14.05 Swiss francs, the lowest since the group’s 2008 creation through the merger of IAWS in Dublin and Switzerland’s Hiestand. The company’s market value fell to the equivalent of €1.13 billion.

Goodbody Stockbrokers analyst Jason Molins estimates that the profit warning will leave its net debt at 3.8-3.9 times earnings before interest, tax, depreciation and amortisation (ebitda). That's very close to its current pledge – or covenant – to its banks that the ratio not exceed four times.

“We’re doing everything we can and everything that needs to be done to stay covenant compliant,” said Mr Toland. “And we don’t need a disposable to be happening at the end of the year at the state of the current forecast to be covenant compliant.”

The breach of a covenant can result in lenders applying penalties or calling in a loan. However, lenders can also waive covenants on a temporary or permanent basis.

Meanwhile, the group said talks about its 49 per cent stake in French frozen foods group Picard, which was acquired three years ago, are advancing as planned – though it failed to reiterate its previous forecast that a deal would be done by the end of July.

The investment cost Aryzta €446.6 million in 2015. Analysts estimate that the company will have to take a knock-down price of €350 million as it works with its joint venture partner, amid reports in recent months that US private equity giant Blackstone is circling the stake.

Still, Aryzta said a recent refinancing at Picard would deliver a €35 million dividend to the company. It comes only months after a previous refinancing at the French company resulted in a €54 million special dividend payment to Aryzta.

"For some time now our view on Aryzta is that buried beneath a mountain of debt there is a dull but attractive business that fulfils a needed and value-added service to retailers and restaurants," said Jonathan Fyfe, a London-based analyst at Mirabaud in a note to clients. "Today's results, and in particular the failure to secure pricing, damages that thesis and, frankly, brings management's credibility into question."