Barry Callebaut shares rise after Barclays updates on cocoa price cuts and cost cuts By Investing.com

Investing.com — Shares of Barry Callebaut (SIX:) rose on Tuesday after Barclays upgraded the Swiss chocolate maker to “overweight”, citing a promising outlook driven by normalizing cocoa prices, increased outsourcing opportunities and substantial progress in reducing costs. initiatives.

At 3:35 am (0735 GMT), Barry Callebaut was trading 6.5 percent higher at CHF 1,550.

Barclays also revised its price target to CHF 1,800 from CHF 1,450, reflecting increased confidence in the company’s ability to meet recent challenges and improve profitability.

Over the past year, skyrocketing cocoa prices have put pressure on Barry Callebaut’s margins, leading to cautious sentiment around the stock.

“Early signs are encouraging as, according to ICCO Executive Director Michel Arrion, global cocoa production is likely to recover in 2024/25 from October (see Global cocoa stocks fall but 2024 production /25 will recover), which both BARN and Mondelez (NASDAQ: ) confirmed at our recent Global Consumer Staples conference call this month,” analysts said.

In addition, Barry Callebaut projected customer prices of percentage increases from the mid-singles to the mid-teens for 2025, depending on the cocoa content of various products.

Although some customers have delayed pricing decisions pending greater clarity on cocoa costs, the potential for lower prices could reduce the need for further increases, easing pressure on volumes.

Barry Callebaut has already endured significant price increases in its markets over the past two years, with limited impact on volume – a testament to the low price elasticity of the confectionery sector.

Added to this is Barry Callebaut’s growing outsourcing business, which Barclays identifies as a significant driver of future growth.

The company recently won a major outsourcing contract in North America, which could represent more than 2% of its total volume.

This contract win suggests that Barry Callebaut’s outsourcing drive, which has slowed in recent years, is recovering.

In addition, the upcoming European Union Deforestation Regulation (EU DR), which will enter into force at the end of 2024, could further boost outsourcing demand as chocolate manufacturers look to mitigate the complexity and costs of compliance.

Barry Callebaut’s investments in systems to manage these regulatory challenges make it well-positioned to benefit, especially as its competitors may not be as prepared.

Barry Callebaut’s ability to capitalize on outsourcing opportunities is significant, with 60% of the global chocolate market – approximately 7 million tonnes – still untapped.

Rising demand for specialty products such as sugar-free and dairy-free chocolate is expected to add complexity to supply chains, prompting more companies to outsource production to industry experts such as Barry Callebaut.

The North American outsourcing deal alone supports the company’s volume outlook, giving it an edge over end-market growth in FY25.

Another factor boosting investor confidence is the company’s steady progress in its cost-saving program, which aims to achieve savings of CHF 250 million by FY27.

Over the past year, Barry Callebaut has made considerable progress, closing three factories in Germany, Malaysia and Italy and achieving most of its SKU rationalization targets.

Barclays has raised its cost saving assumptions by CHF 25 million for FY25-FY27, leading to an upward revision of its FY26-27 EPS forecast by 6% for the stock.

Financially, Barry Callebaut is poised for further improvements, particularly in its cocoa processing operations. The company’s combined ratio – a key measure of profitability for cocoa milling – improved from 3.6 times to 4.6 times in the first nine months of FY24.

With a typical 3x profitability threshold in the cocoa industry, this improvement bodes well for Barry Callebaut’s global cocoa business in FY25, contributing around CHF 50 million to EBIT, according to Barclays.

While the outlook is increasingly positive, Barclays noted some potential risks to its bullish outlook. Continued high cocoa prices could put pressure on BARN’s end markets, leading to a more conservative outlook for FY25.

Additionally, food safety concerns remain a risk; a recent salmonella discovery in Mexico was quickly contained, but repeated incidents could damage the company’s credibility.

Barry Callebaut’s stretched balance sheet, weighed down by restructuring costs and high working capital requirements, also limits its margin for error.

Despite these risks, Barclays sees Barry Callebaut as well positioned to deliver stronger results over the next few years, driven by improved cocoa market conditions, outsourcing momentum and cost efficiencies.