30 August 1996

Buoyant launch as Crest shares hit 196p peak

By Philip Clarke

DEALINGS in Dairy Crest shares got off to a flying start on Wednesday (Aug 28), ending the day at 196p, with 20m shares traded.

This compared with the offer offer price of 155p, confirming the City view that the shares were under-valued to start with. But even City analysts were surprised by the level of demand.

Most of these early dealings were between institutional investors who owned 30% of the 111m shares. David Higham of brokers Quilter & Co, which has set up a special Dairy Crest dealing service, reported just one phone call from a farmer in the first two hours trading.

The rapid rise in value comes as a welcome relief for the majority of farmers who opted for shares instead of cash.

A "typical" producer holding 4000 shares with a face value of £6200 would have seen his asset climb to £7840 by the close of trade on Wednesday.

The buoyant launch has also delighted company directors, who have options to obtain significant numbers of shares at the offer price (155p), though not until 1999. "Clearly investors share our view that the company has an exciting future," said chief executive, John Houliston.

A number of reasons have been cited for the instant premium:

&#8226 When the 155p price tag was decided in late July the stock market was depressed with no enthusiasm for new launches. A low price was needed to attract institutional investors.

&#8226 Since then the whole market has turned around, prompted by a better economic outlook, with the FT share index hitting record highs this week.

&#8226 Dairy companies have had a further boost from last weeks clampdown by the Office of Fair Trading on Milk Marques pricing. Unigate shares have increased 8% and Northern Foods 11% in the past month.

"The possibility of a hostile take-over bid at some stage has also added spice to the launch," said Mr Higham.

But despite the instant premium, brokers believe there is scope for further growth in the medium term and suggest farmers should hold on to their shares for now.

"Dairy Crest remains a highly cash generative business," said Nicola Haughney of Liverpool-based Neilson Cobbold. "Trading in the current year has started well, with the group benefiting from higher cheese prices and increased." But longer term she has reservations, not least because 40% of earnings still come from commodity areas.

This concern is shared by West Wales Dairy Crest Shareholders Asssociation secretary Malcolm Stewart, who sees the key brand, Clover, losing market share and complains about the lack of product innovation. "John Houliston has done a splendid job of cutting the company to the bare bones," he said. "We have seen Houliston the knifeman. Now we want to see Houliston the builder."

From a launch price of 155p, Dairy Crest shares soared to 196p on Wednesday, much to the delight of chairman Mike Dowdall (right) and chief executive, John Houliston (left), and to the annoyance of those farmers who took the cash option in the run-up to flotation.