21 June 2002

Dairy Crest share price levels after City profit taking

By Robert Harris

DAIRY Crest shares have staged a partial recovery after the recent slump which wiped hundreds of £s off individual farmers portfolios.

The fall was triggered by the release of the companys latest financial results last week.

Although Dairy Crest announced a 29% rise in underlying pre-tax profits for the 12 months to the end of March, exceptional costs, mainly due to restructuring, eroded actual profit by 14%.

The company also admitted it was facing a tougher start to the current financial year, mainly due to pricing pressure in commodity markets.

While it expected this to be resolved over the year, following recent milk price cuts at the farm gate, City analysts took a dimmer view.

The share price slumped 14% to close at 469p last Friday, a day after the results were released. It then staged a modest recovery to close on Tuesday at 487.5p. But that was still 59p below the previous Wednesdays price of 546.5p, wiping nearly £1500 off a dairy farmers average holding of 2500 shares, which ended up at £12,200.

"Dairy Crest did well to deliver what they said they would," said Michael Landymore of analyst Investec Henderson Crosthwaite. "But the market was a bit offside when it came to exceptional charges, and there was a bit of concern with the robust view on milk pricing, which some feel may push farmers to invest in their own processing.

"There has been a bit of profit taking but I would expect the share value to consolidate at about these sorts of levels."

The company made £73.7m in 2001/02, slightly above City forecasts, compared with £57m the year before, from sales which rose just 5% to £1.37bn.

One-off costs of £42.5m, partly due to the closing of several smaller dairies, pulled actual profits for the year down by £4.7m to £28.9m.

Chief executive, John Houliston, put the strong underlying performance down to increased market share of added-value brands, including Clover spread, Cathedral City mature Cheddar, Frijj drink and Yoplait brands.

Lower costs and increased productivity brought about by the Unigate acquisition in June 2000 also played a big part, delivering a further £11m of benefits during the year.

Underlying earnings per share increasing 28% to 45.2p. A final dividend of 10.2p/share will take the total dividend to £380 for a 2500-share holding.

For a dairy farmer selling 600,000 litres of milk a year that equates to just 0.063p/litre. However, despite the recent poor performance, the share price has posted an overall gain over the past year of 157p, the equivalent of another 0.65p/litre.

But an April price cut of almost 2p/litre, followed by a further 1.25-2p/litre reduction from next month, will leave many farmers receiving about 16.6p/litre through to the end of September.

Drummond Hall, Dairy Crests executive managing director, defended the price cuts. "During the 12 months to March 2002, the period to which these figures relate, the raw milk price went up by 12-15% compared with the previous year.

"Also within these results, we absorbed a pretty dramatic fall in commodity prices. We took a strategic decision to hold our price from January to March despite the slide, which had a significant hit on profits.

"While we cant make any guarantees, markets look a bit more promising, and prices may move forward from October." &#42

Increasing sales of mature Cheddar helped boost profits, says chief executive John Houliston.