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Dairy Crest adds up

RESULT: Plummeting profits at Dairy Crest mask strategic progress, but the latest six-month results are encouraging
November 8, 2012

While Dairy Crest's adjusted pre-tax profits slumped 16 per cent to £19.1m, the latest half-year results show some genuine promise as the milk producer invests more heavily in advertising its growth brands.

IC TIP: Buy at 357p

One element of the profit drop was a 64 per cent slide in operating profits to £2.1m at the low-margin dairies business, which generated 70 per cent of first-half revenue but just 7 per cent of profit. Following a strong show of discontent by farmers, the business held farm-gate prices despite falling cream prices - a major market for the group. Dairy Crest also scaled back some of its milk operations in the most competitive part of the market and milk deliveries have declined. However, action is being taken to restore profits: two dairies have closed and an efficiency drive should cut costs by £20m this year.

The other big impact on profits can actually be viewed in a more positive light as it reflects higher investment in advertising and brand building. The group's four key brands, which include the Frijj flavoured-milk drink and Cathedral City cheese, experienced double-digit volume growth during the period. Dairy Crest is now on a much firmer financial footing, too, following the sale of its French business, St Hubert, for €430m (£344m), which provides it with the opportunity to make growth-focused acquisitions.

Broker Panmure forecasts full-year EPS of 27.9p (50.5p in 2012).

Dairy Crest (DCG)
ORD PRICE:357pMARKET VALUE:£486m
TOUCH:355-357p12-MONTH HIGH:368pLOW: 287p
DIVIDEND YIELD:7.3%PE RATIO:162
NET ASSET VALUE:*NET DEBT:£76m

Half-year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201173922.422.45.70
2012688-7.837.05.70
% change-7-+65 -

Ex-div: 2 Jan

Payment: 24 Jan

*Negative shareholders' equity funds