ORIGIN ENTERPRISES PLC:  TIGHT MARGINS & DIFFICULT CUSTOMERS

 

28th January 2020

 

Origin’s report for the year ended 31st July 2019 accentuated the positive and downplayed the negative. The adjusted diluted earnings per share was up 7.9% to 52.65 cent compared to 2018, we were told. However, the basic diluted earnings per share (calculated in accordance with the accounting standard) was actually down 7.4% to 41.6 cent compared to the equivalent figure for 2018, and this calculation is buried deep in the annual report on page 120.

 

The difference between the adjusted and basic earnings per share calculations is that exceptional costs and most of the amortisation costs are excluded from the former. This raises the reported profit by approximately €14 million, from €52 million to €64 million, hence the higher adjusted earnings per share figure.

 

The exceptional cost of €7 million refers primarily to the write down of Origin’s investment in the Ukraine. The amortisation costs of a further €7 million relate to the annual write down of intangible assets that Origin carries on its balance sheet such as the value of brands, customer & supplier agreements and developed technology.

 

In calculating basic earnings per share, the accounting standard allows extraordinary items to be excluded. However, the €7 million write down of Origin’s Ukrainian business arises from the ordinary course of its activities, and therefore may not be categorised as an extraordinary item. Similarly, the amortisation of intangible assets (where a portion of the value is written down each year) may not be excluded from costs per the accounting standard – with good reason, as the value of such intangibles is very subjective and sometimes questionable.

 

Reference is also made in the annual report to the strong balance sheet, but it is difficult to say just how strong the balance sheet is when €271 million (20%) of the total assets of €1.3 billion is represented by ‘goodwill (on acquisitions) and intangible assets’, both of which are difficult to value.

 

The auditors refer to the subjectivity inherent in the goodwill and intangibles valuations as being a key audit item. They further comment that another key audit item is something called ‘settlement price adjustments’. In lay man’s language, what this means is that Origin is finding it difficult to get its customers to pay the full amount invoiced. With a profit margin of only 3.5% of turnover, that is a particular area of vulnerability.

 

As regards the outlook for Origin, a lot will depend on the success or otherwise of its recent acquisitions in Brazil. In the first quarter trading update announced in November 2019, Origin, stated there was a ‘slower start to trading’. This included the operations in Brazil where weather conditions were blamed.

 

‘Perform, Sustain, Grow’ is the rather grandiose corporate motto on the front of Origin’s annual report. A more suitable motto might be ‘Chasing our debtors...’ Given the risks outlined above, the sluggish share price performance looks likely to continue in the short term.

 

 

Disclaimer: The above does not constitute advice as defined in the EU Market In Financial Directive II, as it is not a personal recommendation.