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Cargill profits growth to slow - but has 'firepower for deals' nonetheless

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Cargill's profits growth is poised to slow, undermined by a retreat in meat processing margins – but that does not mean that the company lacks the firepower for acquisitions, potentially "larger" ones, Fitch Ratings said.

Cargill – the largest US-based agricultural trader, and one of the biggest privately-owned companies – last month unveiled a 57% jump to $1.03bn in operating profits for the June-to-November half, the group saying that profits rose "notably" in its animal nutrition and protein division.

However, after the "strong" half-year performance, "earnings contribution from the protein segment will moderate materially going forward", Fitch Ratings said, after a recovery in livestock prices which has squeezed meat packing margins.

In the US, processors on Monday stood to make $28.85 per animal for pork processing, and a loss of $59.75 per animal for beef packing, according to HedgersEdge.

As of the end of November, margins for both meats were in the black, at a positive $55.35 per head for pork, and $41.10 per head for beef.

'Could seek larger acquisitions'

Fitch added that it was "only forecasting modest earnings improvement for fiscal 2018" for Cargill, highlighting too that the ag giant's profitability would also depend on further success in a consolidation drive begun in 2015, and which has seen, for instance, its number of business units shrunk to 21 from 65.

Cargill's earnings before interest, tax depreciation and amortisation (ebitda) would come at about $6bn for both the current financial year and the year to May 2018, after a period of "stagnation" at some $5bn.

Still, that gives Cargill sufficient muscle to achieve smaller acquisitions.

Cargill will "continue to enhance its corporate portfolio through tuck-in purchases… which should be managed with present cash flow generation," Fitch said.

"Given Cargill's substantial cash position and lower leverage, the firm could also seek larger merger and acquisition opportunities," the ratings agency said.

'Modest' debt burden

The comments reflect an estimate that Cargill's net debt, as a proportion of ebitda had fallen to a "modest" 0.9 times as of November, down from 1.5 times reported 18 months before.

Besides through improved profitability, the group has also lowered its debt burden through measures including the sale over the last two years of $2bn assets such as its US pork business to JBS. Cargill last week unveiled the sale of its stake in Allied Mills, Australia's top miller.

These proceeds have offset some of the $3.5bn cost of acquisitions such as that of salmon producer Ewos from Altor and Bain Capital for E1.35bn, and the $440m purchase of the chocolate business of rival Archer Daniels Midland, both unveiled in 2015.

However, Cargill, which also in 2014 lost out on the $3.7bn auction for Dutch feed group Nutreco, has not of late undertaken any large-scale acquisitions, and not seen its bill for deals come anywhere near the $6.5bn run up after selling its stake in fertilizer group Mosaic six years ago.

By Mike Verdin

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