top of page



28th January 2020


A few years back, the two best value shares on the Irish market appeared to be Fyffes and its sister company Total Produce. Both had strong cash laden balance sheets (Fyffes in particular) and their share prices at the time seemed to undervalue both when compared to the net asset value per share.


A value stock usually needs a catalyst to unlock gains for shareholders. Any one of the following can act as such a catalyst: Firstly, a takeover by a predator, offering 20% to 30% more to shareholders than the current market price (and still leaving substantial value for the acquiring company). Secondly, a special dividend paid to shareholders, where the company distributes its surplus cash to shareholders in this way (or by a share buyback and cancellation, which is more tax effective). Thirdly, the company uses its strong balance sheet to make an earnings enhancing acquisition (as this surplus cash is earning very little).


Each of the above events should result in an appreciation in the share price. This duly occurred for Fyffes shares when it attracted a takeover bid at a significant premium to the then share price.


However, the similar gain that Total Produce shareholders were expecting has not occurred, despite the company making an earnings enhancing acquisition on buying 45% of Dole Foods in July 2018. Why?


At first glance, the Dole Foods acquisition does indeed seem to have enhanced Total Produce’s earnings. The interim results for the six months ended 31st July 2019 shows an increase of a whopping 63% in adjusted fully diluted earnings per share, compared to the same period for 2018.


Why then has the share price steadily declined since its peak in January 2018? The answer, perhaps, is revealed in note 12 to the accounts headed ‘cash flows generated from operations’. This begins with the profit for the period of €49 million. However, the bottom line on the statement shows a figure of minus €26 million for ‘cash flow from operating activities’!


This means that despite making a profit of €49 million for the period, Total Produce experienced a cash outflow of €26 million!


How can there be such a discrepancy between profits earned and resultant cash flow? Surely one would expect a company generating profits of €49 million to enjoy a cash inflow of something close to that figure?


There are two reasons why there is such a discrepancy between profits and cash flow.


Firstly, a substantial chunk of Total Produce’s profits includes a 45% share of Dole’s profits. However, Total Produce does not actually receive any of the cash generated by Dole from its profits (apart from a small dividend) as it owns less than 50% of the stock. This means that a whopping €30 million (being the share of profits from associated companies) is deducted from the profit for the period of €49 million in the cash flow statement.


In other words, of the €49 million profit, Total Produce receives no cash for €30 million of that profit (apart from some minor dividends) as the latter is generated by associated companies – the most significant of which is Dole Foods.

The second reason why the €49 million profit actually results in a cash outflow of €26 million, is due to working capital factors.


Total Produce does most of its business in the first six months of the year (as does Dole). This means that its debtors and creditors figures are usually very high at the half year point, but fall substantially by the year end. Debtors increased by a huge €94 million as at 30th June 2019, whereas creditors increased by €25 million. That resulted in a cash outflow of €69 million (94-25). That is about €20 million higher than the same figure for the 30th June 2018, and this might raise questions about the management of debtors (Dole’s figures are not included as it an associated company, not a subsidiary).


Little wonder therefore, that US value investor Franklin Templeton is bailing out of the stock, given the negative cash flow per share. However, Total Produce CEO, Carl McCann, is playing a long game here. A turning point for the stock may well come when Total Produce makes its next acquisition of Dole stock (which it is entitled to do for a five year period from July 2018). This will bring Total Produce’s holding to above 50%, and it will therefore account for Dole as a subsidiary and not as an associate. More importantly, Total Produce will then have access to Dole’s cash flow.


Watch out for a breakout from the current downward trend in share price. That will almost certainly indicate that Carl McCann is about to take his second (and much more cash efficient) bite of Dole Foods. Nothing much is likely to boost the stock until then.


Disclaimer: The above does not constitute advice as defined by the EU Markets In Financial Instruments Directive II (MIFID), as it is not a personal recommendation.

bottom of page